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Canada's national weekly current affairs magazineTue, 31 Mar 2015 19:56:42 +0000en-CAhourly1http://wordpress.org/?v=3.5.2An ‘atrocious’ first quarter for Canada?http://www.macleans.ca/economy/an-atrocious-first-quarter-for-canada/
http://www.macleans.ca/economy/an-atrocious-first-quarter-for-canada/#commentsTue, 31 Mar 2015 10:16:27 +0000Katherine Dunnhttp://www.macleans.ca/?p=700665March 30: Will March wrap up on a sour note? If the prediction from the Bank of Canada is right, some nasty numbers are coming down the pipe

“Atrocious” is a strong word – and it’s far stronger coming from the Bank of Canada governor Stephen Poloz, who by necessity tends to be careful with his words. Poloz sent out a warning on the impact of the oil rout in a Financial Times interview yesterday. We’ll see what a bad first quarter could mean today as the first GDP numbers from 2015 are released – Stats Canada will release January’s real GDP this morning.

The TSX/S&P Composite Index saw an almost 100-point gain yesterday, and while the gains were widespread, the biggest boost came from a pharmaceutical company takeover. They certainly didn’t come from BlackBerry – while a surprise profit saw shares get a boost on Friday, revenue numbers were below estimates, and the blowback was a 6.3 per cent fall in shares yesterday. The loonie also dropped almost 0.6 cents yesterday, and starts the day below 79 cents.

Today will be a busy day for Canada. Besides real GDP numbers for January, we’ll see New Brunswick’s budget, and the set of payroll, employment, earnings and hours for January from Statistics Canada. This means we can take a long look tomorrow at how the first month of the first quarter shaped up for Canada as oil prices continued to fall (note “atrocious,” below.) This morning, the U.K. announced that fourth-quarter GDP had been revised upwards, just in time for the general election in early May, and Germany pushed record unemployment even lower. Key inflation numbers and the jobless rate are also expected this morning from the eurozone.

An “atrocious” first quarter for Canada? Bank of Canada governor Stephen Poloz gave an interview to the Financial Times, published yesterday, talking about the impact the oil rout has had on the economy. The key line? “The first quarter of 2015 will look atrocious, because the oil shock is a big deal for us.” Poloz reaffirmed his belief that exports would help the economy rebound in the second half of the year, but said cutbacks by energy companies would weigh against the consumer benefits of lower oil prices. He also said the Bank, which has abandoned “forward guidance” – the explicit practice of giving a timeline for when rate hikes could come – could take the practice up again, along with asset buying, if needed. In January, the Bank made a surprise cut to the benchmark rate, down to 0.75 per cent, which Poloz has characterized as “insurance” on the impact of the oil crisis. Analysts are currently predicting a decline for January’s real GDP numbers.

Rumours, intrigue, markets, mergers. The big mover on the TSX yesterday was Catamaran Corp., a pharmaceutical benefits company, which gained nearly 25 per cent after news of a $12.8-billion (cash) takeover deal. The offer for the company, which largely works with employers on securing health benefits, comes from another health-services company, UnitedHealth Group. The same day, the Vancouver mining company Teck denied rumours it was weighing a merger with the London-based, Chilean mining company Antofagasta PLC, as reported by Bloomberg, which would have made it one of the world’s biggest copper producers. But as the Financial Postpoints out, both companies, while public, are tightly controlled by families – and neither have demonstrated any willingness to give up the reigns. Mergers and acquisitions, particularly in health care and telecoms, have been on a roll this year: the first quarter of this year saw more than $95 billion worth of health care deals, 70 per cent higher than last year, with real estate deals and telecoms the runners-up.

Iran and the price of oil. This week, oil has been rising and falling on the potential outcome of negotiations between the U.S. and Iran on a nuclear deal, which could end sanctions and release up to a million barrels of oil onto the markets, according to the country’s oil minister. As the success of negotiations looked more likely yesterday, oil slipped for the third consecutive day, and when the chances of a successful negotiation seemed more likely, oil made advances. You may recognize the moral queasiness from last week’s announcement of Saudi air strikes in Yemen, largely perceived as being a proxy for conflict with Iran: on hopes they would result in a blockage in a choke point for oil transport, oil got a sudden boost. There’s another, long-term side to the story of Iranian sanctions, Iranian oil, and the impact of foreign oil companies. The country, OPEC’s fifth-largest producer, is believed to hold 10 per cent of the world’s reserves, with underdeveloped gas fields, and foreign companies could be eager to get back in on the prize, despite a long and violent history. The parent company of BP once controlled the country’s energy industry until it was nationalized in the 1950s, which eventually led to a Western-backed coup. In the mean time, U.S. reserves of oil are expected to hit another high.

The race to stream your music. Jay Z got a lot of famous friends – including Beyoncé, Rihanna, Kanye West, and Arcade Fire – together to announce a music streaming service called Tidal. Jay Z had already bought the service as part of Aspiro, a Swedish rival to the streaming service Spotify, and said he would make the streaming industry more friendly to musicians – partly through packages that are more expensive than their chief rivals – with no free streaming options to lure in subscribers. The service will also feature some albums from Taylor Swift, who removed all her albums from Spotify last fall over a dispute over streaming payments for artists. At the same time, Alibaba signed a deal with BMG, which will allow them to stream major artists like Bruno Mars and the Rolling Stones over their own streaming services. Although known for being a massive e-commerce retailer, Alibaba is also a major purveyor of digital music streaming in Asia.

]]>http://www.macleans.ca/economy/an-atrocious-first-quarter-for-canada/feed/0The bumpy road back to a ‘normal’ economyhttp://www.macleans.ca/economy/economicanalysis/the-bumpy-road-back-to-normal/
http://www.macleans.ca/economy/economicanalysis/the-bumpy-road-back-to-normal/#commentsThu, 26 Mar 2015 21:07:32 +0000Katherine Dunnhttp://www.macleans.ca/?p=698575After years of crisis, we may have trouble believing the Bank of Canada still recognizes what normality looks like

The governor of the Bank of Canada would like you to know that everything is going just as planned. January’s interest-rate cut—a trim from one to 0.75 per cent, just when many had predicted the Bank was gearing up for a rate hike—may have come as a surprise. Keeping the rate steady earlier this month threw investors off guard yet again. And putting an end to “forward guidance” — the central bank practice of giving explicit hints about when a change to interest rates will come — yeah, maybe that irked a few people. In fact, the governor’s advice has bumped along on a broken record: no hints, no peaking, no signs. Start looking at the economic data, just like me—be patient, and wait and see.

Put your trust, in other words, in the Bank of Canada, even if occasionally that trust is blind.

This message of credibility from the Bank’s governor, Stephen Poloz, was clear. So clear, in fact, it was right there in the title of his speech: “Central bank credibility and policy normalization.” The speech was also Poloz’s first in the U.K. as governor of the Bank, delivered to an international crowd at the Canada-U.K. Chamber of Commerce, in a swanky hotel just steps from St. Paul’s Cathedral (and mere blocks from a central bank run by that other Canadian).

Poloz tackled the subject head-on: “Do very low long-term interest rates and recent increases in financial market volatility represent an erosion of central bank credibility?” he asked, starting his speech over the gentle clinking of silver wear on china plates. “It probably won’t come as a surprise to you that I would say ‘No.’ ”

Cue appreciative laughter from the crowd.

But while the speech has been cast as a rousing defences of the bank’s policies—as rousing as defences of monetary policy can get over a noon-hour luncheon, in any case—it wasn’t without precedent. Far from just a short-term attack on would-be critics, or offering any real insight into the Canadian economy (not a single questioner in the post-speech Q&A had a Canadian accent, and oil was barely touched on), Poloz was on well-trod territory, urging faith and calm in the face of uncertainty. After all, more than six years ago, Mark Carney was standing on the same stage and addressing the same, suited crowd. His speech, too, came under a headline of misleadingly dull aplomb: “Building continuous markets.”

Carney’s remarks began with flattery, noting the long and deep history of finance and colonialism stretching between Canada and the U.K., but set in the present day against a wallpaper of uncertainty, or, as the governor himself called it, a “maelstrom.” Poloz spent very little time plumping London egos, but he was smart to begin on the same tone. He promptly noted that in the City, London’s banking district, one can feel the “pulse” of the global financial system, “and it feels a bit like an irregular heartbeat to me.”

Cue more appreciative laughter.

In 2008, Carney was pitching for central banks to step up to the plate, to back key institutions, maintain liquidity, and keep confidence flowing, if not exactly high. This required not just the backing, but the immense credibility, of central banks. ”With the breakdown of many markets, the pendulum is swinging away from market- based finance back toward bank-based finance,” he said. In 2015, Poloz is saying it’s time for the market to take a deep breath and accept some volatility, without suffering a massive case of the jitters. “This represents the natural reaction of financial markets to economic uncertainty and a return to a normal trading environment – not an erosion of central bank credibility.”

But both central bankers, then and now, asked the same question, facing some of the same problems, years apart, on the value of periodically shoring up the Bank of Canada’s credibility. During times of normality, we may not have appreciated the reserves of trust we would have to place in our central banks. And after years of crisis, we may have trouble believing the Bank still recognizes what normality looks like—or at least, what the “new normal” may be.

Bank of Canada Governor Stephen Poloz addressed the Canada-United Kingdom Chamber of Commerce Thursday. What follows is a transcript of his prepared speech, titled ‘Central Bank Credibility and Policy Normalization’:

I am happy to be in the City and to have the opportunity to speak with you this afternoon. You can feel the pulse of the global financial system here, and it feels a bit like an irregular heartbeat to me.

The recovery from the Great Recession has been a long, drawn-out affair, with some countries emerging faster than others. Long-term interest rates are extremely low, well below central banks’ inflation targets. Financial market volatility has gone up across the board, as economies and policies diverge and the prospect of policy normalization becomes more real.

Today, I would like to consider what this all means for central bank credibility, which is something we should all care about. Do very low long-term interest rates and recent increases in financial market volatility represent an erosion of central bank credibility? It probably won’t come as a surprise to you that I would say no. Central banks are doing their jobs in a very challenging setting. In my time today, I will talk about what we can learn from low interest rates and increasing financial market volatility, as well as what we can expect as we go through the process of normalizing monetary policy.

Long-Term Interest Rates and Credibility

Let’s begin by looking at the extremely low borrowing costs we see in many economies. Consider, for example, the return that one would receive on a 10-year bond issued by any G-7 government and held until it matured. Investors would be accepting an annual return that would be below the central bank’s inflation target – in some cases, well below.

What is it telling us when investors are willing to receive such low returns? Central bank policy frameworks may differ, but the concept of inflation control is at the heart of monetary policy in most economies. Are low yields an indication that investors think we will be unable to bring inflation back up to its target?

To help answer this question, let’s look at the Canadian data. In a recent paper, Bank of Canada economists Bruno Feunou and Jean-Sébastien Fontaine used a term structure model to decompose the yield on a 10-year Government of Canada bond into three components: long-term inflation expectations, expectations of real short-term interest rates and the term premium.

Our analysis shows that Canadian long-term inflation expectations have stayed quite close to our 2 per cent target since the onset of the financial crisis. This message is corroborated by other methods we have of measuring longer-term inflation expectations. These include surveys of professional forecasters and the break-even inflation rate that is based on comparing nominal and Real Return Bonds.

Let me pause here to stress a point. Why are inflation expectations so important? It’s because well-anchored expectations help promote stability in inflation and output as well as the financial system. Solid inflation expectations also give central banks more leeway in responding to temporary shocks, such as changes in energy prices or movements in the exchange rate.

Evidence shows that, for the most part, central banks have been doing well at keeping expectations anchored in a very challenging environment. Measured in this way, it is clear to me that our credibility is intact. But we won’t take false comfort. Vigilance is required, because if long-term expectations shift away from the target, it can be very difficult to re-anchor them.

So, to understand why long-term interest rates are so low, we need to look at the two other components – expectations for real short-term interest rates, and the term premium. These components account for the drop in long-term bond yields that we have seen since the crisis.

This is relevant to our topic because these components have also been heavily influenced by central banks as they worked to meet their inflation goals in the aftermath of the crisis.

Let me make four points here. First, expectations for real short-term interest rates depend on the level of the real neutral rate of interest – the rate that will generate just enough savings to finance investment in the long run. The Bank of Canada’s Senior Deputy Governor, Carolyn Wilkins, gave a speech last year in which she outlined why we should expect to see a lower real neutral interest rate globally. The reasons include slowing labour force growth and productivity growth in developed economies, suggesting a drop in demand for investment, and a very strong supply of savings from many emerging economies. So we must start thinking about equilibrium interest rates from a lower starting point.

Second, on top of these structural factors, we’ve seen central banks react to the financial crisis and subsequent Great Recession by aggressively lowering policy rates. Several central banks, including the Bank of Canada, also found themselves constrained by the effective lower bound on interest rates. By issuing forward guidance in various forms, we were able to reduce expectations for the future level of the policy rate. This added to the pressure on expectations for real short-term rates.

Third, central bank actions and forward guidance have served to reduce uncertainty about short-term policy interest rates, thus reducing the term premium.

Fourth, the quantitative easing programs employed by some central banks included purchases of long-dated bonds, reducing the yields on those bonds. There is strong evidence that those purchases have even pulled down yields in markets that did not have quantitative easing, such as Canada.

To sum up, there are very good reasons why long-term interest rates are unusually low, but the de-anchoring of inflation expectations is not the central driver. Rather, low long-term interest rates reflect a combination of a declining neutral rate of interest and the actions being taken by central banks to foster stronger growth in pursuit of their inflation targets. Ultimately, inflation expectations, and the inflation outcomes that support them, are how a central bank’s performance should be judged.

Financial Market Volatility and Credibility

But some would judge a central bank’s credibility against a wider range of criteria, including the level of financial market volatility. In recent months, measures of volatility have risen in a wide variety of asset classes and across a number of countries, in U.S. Treasuries, in exchange rates, and in the Standard & Poor’s 500, just to give a few examples. There are many factors contributing to this increase, and I won’t try to list them all. But I will mention four.

First, the forces acting on the global economy are powerful and affecting many economies differently. The post-crisis headwinds to growth, including widespread deleveraging and lingering uncertainty about the future, have proved highly persistent. Furthermore, the sharp drop in oil prices is having a significant effect, positive for some economies and negative for others. This shock surprised everyone, and the fact that it is so large and happened so quickly means that many of us have had to work hard to fully grasp all of its implications. Several central banks around the world, including the Bank of Canada, reacted to this environment with policy announcements that weren’t fully anticipated by investors.

Second, these forces are leading to a divergence in monetary policy paths among the big three central banks. The European Central Bank and the Bank of Japan are implementing quantitative easing while the Federal Reserve is beginning the process of normalizing its policy. This divergence is naturally leading to a significant adjustment in the outlook for interest rates and currencies, as well as higher volatility in bond and foreign exchange markets.

A third contributor to financial market volatility is related to global regulatory reform. The Basel III and other reforms are clearly making the global financial system safer, and that is job one. But they have also reduced incentives for banks and some dealers to hold inventory, act as market-makers and provide a shock-absorber function in times when volatility is high.

Fourth, financial market volatility has been compressed in recent years by the one-sided nature of our economic outlook. With many economies operating with excess capacity, economic growth remaining weak and deflation a real threat in some economies, interest rates have been expected to stay very low for a very long time. This expectation was reinforced by forward guidance and other unconventional policies of central banks. But those expectations are starting to shift. The global recovery, although uneven and fragile, is progressing, and we are approaching a transition phase – taking the first steps on a path toward normalization, if you will.

Eventually, the global headwinds will dissipate and central banks will be able to transition away from unconventional policies and return to more conventional ways of conducting monetary policy. This will mean a return to two-sided risks, where interest rates could rise or fall depending on how economies evolve. During this transition toward normal, more financial volatility is to be expected.

To me, these seem to be legitimate reasons to expect higher financial market volatility today. And is the volatility we’re seeing now abnormally high? No. While market volatility has risen recently, it has done so from historically very low levels. It has begun to return closer to historical averages, not abnormal levels.

So, is this increase in volatility actually a negative development? No. Above all, volatility relates to unexpected economic developments to which central banks will necessarily respond in order to fulfill their mandates. When shocks to the economy occur, whether positive or negative, higher financial market volatility is a natural consequence, an integral part of the economy’s equilibration process. Such financial volatility is neither inherently bad nor good. And if it reflects the emerging possibility that the one-sided outlook we have experienced for several years is finally becoming more balanced, then that is unambiguously good news.

Getting Back to Normal

Still, as we begin to work through the process of getting back to normal, the question remains: if explicit forward guidance can suppress financial market volatility, why not keep using it?

In this context, what I mean by forward guidance is explicit statements around the future path of interest rates. Central banks inevitably talk about the future, and any such statement can be construed as a form of guidance for markets. All such forms have their uses, in the right context. But I reserve the term “forward guidance” to mean specific comments, or conditional commitments, around interest rates.

There’s absolutely no question that forward guidance is a valuable part of the central bank tool kit. It has clearly been helpful in Canada and elsewhere. But as I said in a paper published last year, we at the Bank of Canada believe that statements to explicitly guide market expectations about the future path of interest rates are best reserved for extraordinary times, such as when policy rates are at the effective lower bound, or during periods of market stress. Keeping forward guidance in reserve ensures that it will have a greater impact when it is deployed. Otherwise, it becomes addictive and loses some of its impact – in short, forward guidance is not a free lunch, it comes with costs.

Let me elaborate by stressing some of the points I made in that paper. Forward guidance works by taking some potential actions by the central bank off the table. A commitment not to raise interest rates for a given period, or until certain economic conditions are met, can flatten the yield curve and add stimulus to the economy. But in doing so, the commitment creates a skewed bet for investors. Volatility falls, for the time being, as market participants naturally position themselves around this bet, often using significant leverage to do so.

So, what happens when circumstances change, as they inevitably do? What happens when investors start to consider the possibility that the guidance will change? The positions that are stacked around the central bank’s guidance unwind, and all that suppressed volatility suddenly resurfaces in financial markets, often to levels that surpass historical averages. That’s when we pay the price of forward guidance. To be sure, when the policy rate is at the effective lower bound, the benefits of forward guidance can easily outweigh the costs. At other times, the costs loom larger.

Indeed, in normal times, when economic and financial risks are clearly two-way, there is a very basic law of economics at work. Volatility happens. It is a force of nature. Economists call this underlying volatility “shocks” – unexplained shifts in consumer demand or business behaviour, or oil-price shocks, or shocks from foreign economies, and, yes, financial market shocks. This volatility must go somewhere in the economy. Central banks target inflation, which means stabilizing inflation and economic growth, not interest rates. Pursuing that mandate means that financial markets carry more of the natural volatility that arises.

To make this point in its most extreme form, consider how a hypothetical, all-seeing central bank would behave. That central bank would anticipate all shocks to the economy and move interest rates up and down to offset them, so inflation would always stay right on target. Looking at the data afterward, we might think that all the interest rate and financial market volatility was unnecessary, because inflation was on target the whole time. In other words, perfect policy making might look silly, simply because people cannot see the underlying shocks – but the financial market volatility would be a natural consequence of the central bank’s efforts to achieve its mandate.

Of course, we haven’t been in normal times for quite a while. We are just taking the first tentative steps toward normalization, and the road won’t always be smooth, as our recent experience in Canada illustrates. Late last year, we saw encouraging signs that the economic recovery was broadening. Stronger exports had started to be reflected in greater business investment. However, as we approached our January decision on interest rates, we had to consider the unexpected plunge in global oil prices. Given the importance of oil to our economy, this shock represented a significant downside risk to our projected inflation profile. It also posed a risk to financial stability through the reduction in income that it implied. Because lower oil prices mean lower Canadian income, the shock would worsen the debt-to-income ratio of Canadian households, even if no new borrowing occurred.

We thought in January that it would be best to act sooner rather than later, given the magnitude of the shock and the immediacy of its likely effects. Indeed, oil prices were still falling, and to levels below the assumptions built into our forecast. Accordingly, we took out some insurance in the form of a 25-basis-point cut in interest rates. The reaction to this cut across the yield curve and in the exchange rate would help to cushion the blow to the economy from the oil-price decline, bringing us back sooner to full capacity and sustainable 2 per cent inflation. It would also help mitigate the rise in the debt-to-income ratio by reducing the drop in income, although debt levels could rise at the margin.

We knew that financial markets would be surprised by the move in January, and we generally prefer to avoid surprises. But we will do what is necessary to fulfill our inflation-targeting mandate.

Over the following weeks, we saw inflation decline as expected, and output expand in line with our projection. We saw financial conditions ease, and oil prices stabilize in a range reasonably close to our January projection. This made us feel increasingly comfortable with the amount of insurance we had already taken out, which led to the decision to keep rates unchanged earlier this month. The negative effects of lower oil prices are beginning to appear; the positives will take longer to emerge. So we need to watch these competing forces play out in the economy, and the January rate cut has bought us some time to monitor the situation as it evolves.

Some have characterized this as a move to “data dependency.” I have to say I find this a bit strange. Data are always crucial in determining how the economy is progressing. Even in extraordinary times, central banks depend on data to help them evaluate how the economy is performing relative to expectations.

As our economy gradually gets back to normal, we will continue to speak with business leaders to get their perspectives. We will continue to watch the data closely, as we always do, and see how the numbers evolve relative to our forecasts. And we will look to market participants to keep watch on the same data, and form their own opinions about what they mean.

Our communications focus on explaining how we expect the economy to unfold and being transparent about the risks that the central bank is weighing. All else equal, this should help reduce the chances of surprising markets. Still, in normal circumstances, it’s natural that there would be volatility as economic surprises occur. But, we think it best to have this volatility reflected in prices in informed, well-functioning financial markets, rather than be artificially suppressed by forward guidance.

Conclusion

Allow me to conclude. As we have seen, well-anchored inflation expectations reflect the unwavering pursuit of our inflation goals. They show that market participants continue to believe both in our commitment and our ability to return inflation to its target.

Unconventional monetary policies have played a key role, in Canada and elsewhere, in promoting growth and helping to meet our inflation goals. As the global economy shakes off the Great Recession, and the era of unconventional policies comes to an end, a return to ultra-low levels of financial market volatility is unlikely. Bouts of increased volatility can be expected as guidance-influenced positions are unwound and as markets react to shocks. As we go through the normalization process, this represents the natural reaction of financial markets to economic uncertainty and a return to a normal trading environment – not an erosion of central bank credibility.

The Bank of Canada will continue to pursue and fulfill our inflation-targeting mandate. We will continue to follow the policies necessary to ensure a timely return of inflation to target while being mindful of financial stability considerations. This process takes place in an uncertain world where shocks happen daily, behaviour shifts repeatedly, and our analytical tools and models can offer only rules of thumb. In that sense, monetary policy is a very imprecise business – less like engineering and more like risk management.

Ultimately, our credibility will hinge on how well we meet our mandate over extended periods of time. I’m confident that we will continue to get the job done.

]]>http://www.macleans.ca/economy/economicanalysis/for-the-record-stephen-polozs-speech-on-central-bank-credibility/feed/0Looking back at the financial crisishttp://www.macleans.ca/economy/looking-back-at-the-financial-crisis/
http://www.macleans.ca/economy/looking-back-at-the-financial-crisis/#commentsThu, 05 Mar 2015 12:32:02 +0000Katherine Dunnhttp://www.macleans.ca/?p=688623March 5: A dose of hindsight – and stress tests – as we look back on banks in the year 2008. Plus, Brazil's inflation battle and China's growth expectations

On Tuesday, with the NASDAQ at new dot-com heights, we went back in time to 2000. Today, we’re going back to 2008.

A slate of stress tests, transcripts, investigations and other wonk-y assessments are out today, on what happens when banks go bad (or at least don’t have a sufficient capital cushion) and central banks dawdle. Get ready to revisit the heady days of the financial crisis.

But before then, a look at the no-news-is-big-news from Canada: yesterday, the Bank of Canada left the interest rate unchanged at 0.75 per cent, noting that the economy appears to be clipping along as planned. We’ll also take a look at Brazil, where the central bank hiked the benchmark rate still higher as inflation skyrockets, while in China, officials lowered their expectations for growth.

This morning, the Bank of England announced their benchmark rate, leaving the rate at 0.5 per cent, where it has been since 2009. A meeting for the European Central Bank today is expected to announce when the first dose of quantitative easing will come.

The Bank of Canada stays the course. The benchmark rate stayed steady yesterday at 0.75 per cent. Speculation had been up and down the last few weeks, after a surprise rate cut from one per cent – where the rate had been for five years – surprised analysts. “Canadian economic growth in the fourth quarter of 2014 was consistent with the Bank’s expectations,” the BoC noted in a release, adding that conditions have “eased materially” since January, and non-energy exports and investment are helping to fill the gap left by the oil rout. But then again, it simply might be too early to tell how bad the damage is: the Bank also noted that the full impact of the lower oil might not be felt until halfway through the year, opening up another can of speculation for whether a cut could be in the offing at the next meeting.

China lowers their expectations. Chinese officials said it’s time to accept a “new normal,” lowering expectations for growth this year to “around seven per cent” during a meeting of the Communist Party’s plenary session. Last year China grew 7.4 per cent, to expectations of 7.5 per cent growth, the lowest since the fallout of Tiananmen Square in 1990, and manufacturing and inflation numbers have repeatedly showed signs of a general slowdown of the country’s economy. It’s been a steep drop: while the two years before 2014 saw around 7.7 per cent growth, the three decades previous had average rates of growth over 10 per cent. The meeting also produced targets on job creation, foreign direct investment and CO2 reduction.

Prices are skyrocketing in Brazil. With so much talk of the threat of deflation in the eurozone and slowing price rises at home, we risk overlooking the major economies having the opposite problem. In Brazil, the central bank yesterday hiked the benchmark rate to 12.75 per cent – a full 12 per cent above Canada’s – attempting to halt high inflation even at the risk of a recession. Annual inflation is currently 7.36 percent, with prices rising by 1.33 per cent in January alone – since the last central bank meeting in January, the real has slid in value by 12.7 per cent. There are plenty of other problems: last year, S&P lowered the country’s credit rating to one notch above junk, and the government has since been trying desperately to keep the rating from sinking lower. The budget released last month did post a surplus, but came below estimates – and excluded payments for interest, cities/regions, and state-owned companies. In the meantime, Brazil is being wracked by a corruption scandal at Petrobras, the country’s largest company and also its state-owned oil company.

Wall Street gets a stress test. As a result of regulation from the financial crisis, today will see Wall Street’s banks – 31 in all – get the early results of the U.S. Fed’s stress tests, which determine whether they have enough capital (relative to assets) to withstand various theoretical financial crises. The banks also have to present their plans to deal with various stress scenarios, and so will be officially judged to have passed or failed the tests next month – if they don’t pass, the consequences include not being able to pay out dividends. The annual tests, designed to stave off another 2008, do actually fail banks: last year, Citibank failed for the second time in three years, and the American branches of three foreign banks (Santander, HSBC and Royal Bank of Scotland) also failed.

Central banks and the financial crisis. How did the U.S. and U.K. central banks deal with the financial crisis? First on the list is the release of transcripts from the Fed, and the New York Times’ Upshot headline says it all: “The Fed knew the economy was a disaster in 2009. Here’s what they talked about instead.” In large part, this meant discussing who would be responsible for any losses (the American taxpayer, regardless), and generally dawdling, dilly-dallying and doubting. To be fair, it was a stressful, confusing time, and everything looks clearer in hindsight. But one of the central bankers pushing urgency at the time – in this case, a quantitative easing program – was actually Janet Yellen, who noted, “the economy is just a disaster area,” and urged the Fed to get a move on.
A spotlight has also been turned on the Bank of England regarding whether officials were involved in fraudulent liquidity auctions during the early days of the financial crisis. At the time, the Bank tried to keep money flowing by lending using low and even negative interest rates backed by all kinds of collateral. The inquiry relates to whether these auctions were rigged. An internal investigation has been ongoing since the summer, but now the U.K.’s fraud office is involved. The Bank is also feeling the strain over the fallout from how they dealt with the more recent foreign exchange rigging scandal in London.

OTTAWA – The Bank of Canada is holding its key interest rate at 0.75 per cent — for at least another month.

In its latest rate announcement, the central bank said Wednesday it stuck with the rate because the evolution of oil prices as well as the global and Canadian economies had largely unfolded in line with its projections.

The bank underlined several areas where it said economic conditions had hit close to its assumptions: the stronger performance in non-energy exports and investment, the economic growth reading for the final three months of 2014 and core inflation near its two per cent target.

“In light of these developments, the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected,” the bank said in a statement.

It was the bank’s first policy announcement since January when governor Stephen Poloz caught markets by surprise by lowering the rate a quarter of a percentage point from one per cent.

In explaining January’s rate reduction, the governor said it was necessary as insurance because the drop in oil prices would be “unambiguously negative” for the economy.

Most experts had anticipated the bank’s decision to hold the line on the rate Wednesday, but only a couple of weeks ago, many of them had predicted a second cut. Those expectations changed over the past week after fresh data releases and remarks by Poloz led them to believe the bank would stand pat.

Last week, Poloz said January’s rate drop bought the bank extra time to assess the impact of oil’s decline.

Some economists expect the bank to introduce a cut at its next scheduled rate announcement on April 15, when it will also release its spring monetary policy report.

On Wednesday, the bank said financial conditions in Canada had “eased materially” since January, in response to its recent rate reduction and global developments.

The bank also said the bulk of the oil slump’s negative effects will strike the Canadian economy in the first half of 2015 — and could be more front loaded than it had predicted.

]]>http://www.macleans.ca/economy/bank-of-canada-keeps-trendsetting-interest-rate-at-0-75/feed/0It’s the Bank of Canada’s big rate decision dayhttp://www.macleans.ca/economy/its-the-bank-of-canadas-big-rate-decision-day/
http://www.macleans.ca/economy/its-the-bank-of-canadas-big-rate-decision-day/#commentsWed, 04 Mar 2015 12:43:15 +0000Katherine Dunnhttp://www.macleans.ca/?p=687785March 4: The Bank of Canada keeps the benchmark rate steady. Plus, Target owes money to itself, and the U.S. is running out of room for their oil

Speculation over the Bank of Canada has been heating up over the last couple of weeks – will they cut the rate or won’t they? – after the surprise rate cut to 0.75 per cent at the last meeting. But there was no need: Stephen Poloz announced this morning that the rate will stay as is. We’ll talk about this more tomorrow.

Today is a heady week for Big Tech, with the Mobile World Congress continuing today, a day after the NASDAQ climbed over 5,000 for the first time in 15 years, surpassing the height of the dot-com bubble. But in Canada, markets were looking less springy, with the TSX/S&P Composite Index dropping more than 100 points at closing yesterday, after Scotiabank’s profits failed to meet analyst expectations. This despite news from Statistics Canada that growth in the fourth quarter was better than expected, with 0.6 per cent growth in the quarter – a 2.4 cent annualized rate. GDP was just one of a spate of data released yesterday, including strong auto sales – in February, the Canadian auto market pushed to just short of two consecutive years of growth, and the strongest February for sales in seven years.

East of Canada, there are also plenty of releases this morning, particularly PMI services numbers, which measure the growth of the services sector, from China, Japan, the U.K. and the eurozone. In other central bank news, today India cut their benchmark rate, and the Bank of England begins a two-day meeting monetary policy meeting today, while Brazil’s central bank wraps up their own meeting.

Target creditors are worried. As the chain attempts to wrap up its failed expansion into Canada, suppliers are worried about a new claim to the credit pool – from a company it created. The property company owes their Target parent company $1.9 billion for the operation of stores, while suppliers of products are looking to receive $400-million, after the chain filed for bankruptcy in January. A quote from a lawyer in Marina Strauss’ story in the Globe says it best: “It takes $1.9-billion of recoveries that otherwise would go to creditors and it shifts it to a Target affiliate,” Mr. Goldman said in an interview. “Target should show the calculations supporting this claim to give creditors proper assurance this is not a contrived debt.” The parent company has its own problems: Target also announced they would cut “thousands” of jobs in the U.S. and India in order to cut costs by $2 billion in two years.

The services industry around the world. Today, many countries are releasing both their services PMI, which measures growth in the services sector. The HSBC Markit PMI index, released today for China, saw the services industry bump up to 52, but the overall trend has remained for slowing growth, as investors worry over what’s next for the Chinese economy. In Japan, the industry weakened, slipping from growth to 48.5 per cent. While manufacturing is key for China – that number came in on Monday – in the U.K., services are the largest industry, and the numbers indicate the industry is still growing fast at 56.7, despite a slight fall from the previous month.

A surprise rate cut from India. The country’s central bank suddenly cut the benchmark rate by a quarter of a percentage this morning, the second time since the year began that the bank has moved to lower the rate, which at 7.5 per cent remains far higher than the rate in most Western countries. A cut was widely expected to come – but not so soon. The cut was seen as likely to come in April, to give a bit of breathing time to a new plan to lower the country’s inflation rate. Over the weekend, the People’s Bank of China also reduced their benchmark interest rate by a quarter of a percentage.

The U.S. is running out of places to store all their oil. The U.S. is producing about a million barrels of oil more than they need a day, with crude supplies at an eighty year high, according to the Energy Department, fuelling worries the price could collapse still further as room tightens. The price of oil has fallen by more than half since last June – today it’s between $50 and $51 so far – and OPEC have pledged to keep their target production at 30 million barrels a day, despite complaints from oil-producing countries in the group who have seen income plummet. This morning, the Saudi oil minister said the price was a result of “market realities” and reiterated that they would not agree to change the target.

More gadgets from the Mobile World Congress. In tech this week it’s all about curved screens and smart watches, but some other products are also getting attention: including eye-activated phones, smart-bicycles, an IKEA lamp with a wireless charging port, and phones that claim to offer secure texting and calls – in an era when even large sim-card makers get hacked by national intelligence services.

]]>http://www.macleans.ca/economy/its-the-bank-of-canadas-big-rate-decision-day/feed/0Central-bank-watching and Alberta’s busted budgethttp://www.macleans.ca/economy/central-bank-watching-and-albertas-busted-budget/
http://www.macleans.ca/economy/central-bank-watching-and-albertas-busted-budget/#commentsTue, 24 Feb 2015 12:48:47 +0000Katherine Dunnhttp://www.macleans.ca/?p=683671Feb. 24: Speeches from the BoC and the Fed, plus, the debate over tax-free savings and the battle to pay with your phone

While there are no interest rate announcements, there will be speeches by both Bank of Canada Governor Stephen Poloz, and by Federal Treasury Chair Janet Yellen, in the U.S., which will be closely parsed for signs of rate cuts, hikes, and the impact of the oil rout. On that note, oil has been between $49 and $50 so far this morning.

Poloz’s speech, at the Western University, will focus on “reinventing central banking,” and you can watch the speech and press conference here. Yellen will be at the Senate banking committee for a semi-annual monetary-policy meeting.

Alberta will also announce the provincial budget today, which is expected to measure how bad the oil rout has been for the province’s bottom line. First-quarter banking season also begins this morning, with BMO kicking off a Big Six reporting season that is expected to be less than bountiful. In Europe, the European Commission is also sounding optimistic about Greece’s very last-minute reform proposals, but a more definite answer on the country’s finances should arrive by end of today.

In Canadian-U.S. news, the bill for the Keystone pipeline is expected to reach U.S. President Barack Obama’s desk, where it is also expected to meet his presidential veto. The veto will be made “without drama or fanfare,” according to the White House, which might be wishful thinking.

Alberta’s oil woes. Today, the province’s finance minister is expected to update the province’s budget, and the numbers are not looking bright. Premier Jim Prentice says the country’s surplus has turned into a half-billion-dollar deficit, with a $7-billion hole in the treasury, as oil companies have begun slashing budgets and laying off staff. A recent report by the Conference Board of Canada also predicted the pain would continue for the province, predicting a 1.5 per cent contraction this year. The debate over Alberta’s fortunes will be especially sharp today, with the expectation of Obama’s veto of Keystone XL, but more bills from Congress could be in the offing.

Will OPEC have an emergency meeting? Speaking of oil, it’s not just Alberta that has seen its fortunes turn as the price has dropped, but many OPEC members, who are desperate for the price to rebound. Nigeria’s oil minister says an emergency meeting could be in the works, months ahead of the group’s next scheduled meeting. The comments by Diezani Alison-Madueke highlight a key crack in the strategies of OPEC members, as Saudi Arabia looks unlikely to agree to a meeting, nor change production targets (still set at 30 million barrels a day), even as Nigeria, Russia and Venezuela have seen their economies buckling under the strain.

How good are tax-free savings accounts? Are they a useful savings tool or a drag on government finances? In a report from the Broadbent Institute, the author calls the accounts a “ticking time bomb,” saying a planned increase in the contribution ceiling for the accounts would result in lost taxes and would mainly help wealthier Canadians. The critique is especially interesting as it comes from Jonathan Rhys Kesselman, who was one of the authors of an earlier report from the C.D. Howe Institute that was supportive of the accounts. His co-author remains firmly in the pro-TFSA camp. The government has said it would double the allowable contributions, up to $10,000-$11,000, and the change could be announced as early as the spring.

The European Commission gives the green light for Greece’s proposals. But not so fast—they still need the approval of the eurozone finance ministers. The Greek government had a midnight deadline for sending in the more detailed reforms and, despite earlier claims they had missed the deadline, they managed to slip just under the wire. A Commission official called the proposals, which were required to provide a more detailed breakdown of costs, “sufficiently comprehensive” and noted strong reforms on combatting tax evasion and corruption. But there are plenty of problems remaining: Not only the eurozone ministers, but the IMF and the European Central Bank still need to approve the proposals. Even if the extension of the 172-billon-euro bailout does go smoothly from now on, there’s a major hurdle: The new 7.2 billion euro in funds is tied to reforms and, until those reforms are in place, the government still has a problem with a lack of cash. For the real wonks among you, here’s a copy of the letter the Greek government sent.

The battle to pay with your phone. In the tech world, battles are the norm: There’s the battle to run a better ride-sharing service, the battle for a better electric car, and the battle for a car that doesn’t need a driver at all. While most of those have to do with cars, lest we forget, the Big Tech showdown continues on all fronts. Now Google is ramping up the pressure for a “mobile payment” showdown with Apple, after announcing plans for its own wallet technology to be auto-installed on certain Android phones. Apple launched Apple Pay last fall. The question now: Is there more money in taking a commission off the payment, selling your users’ purchase data, or both?

]]>http://www.macleans.ca/economy/central-bank-watching-and-albertas-busted-budget/feed/0Central bank: Oil slump could briefly dip Canadian inflation into negativehttp://www.macleans.ca/economy/central-bank-oil-slump-could-briefly-dip-canadian-inflation-into-negative/
http://www.macleans.ca/economy/central-bank-oil-slump-could-briefly-dip-canadian-inflation-into-negative/#commentsThu, 19 Feb 2015 19:59:22 +0000The Canadian Presshttp://www.macleans.ca/?p=682099Deputy governor, however, says that even if the annual rate dips below zero it would not be considered deflation

OTTAWA – The turbulence of the global oil slump could briefly nudge the Canadian inflation rate into negative territory this spring, a senior Bank of Canada official said Thursday.

But deputy governor Agathe Cote offered some reassurance, saying that even if the annual rate dips below zero it would not be considered deflation.

She noted that true deflation, which can be damaging for an economy, would require a period of widespread price declines.

“Rest assured — even if inflation turns negative for some time that would not constitute deflation,” Cote said in prepared remarks of a speech she delivered in Mont-Tremblant, Que., north of Montreal.

“When inflation expectations are solidly anchored, as is now the case in Canada, there is no reason to fear deflation.”

The central bank tries to keep inflation close to an ideal two per cent target and it can adjust its trendsetting interest rate to help the economy hit that bull’s-eye.

With lower crude prices expected to continue pushing down on inflation in the coming months, Cote cautioned the potential sub-zero scenario could happen in the second quarter of 2015.

In its monetary policy report last month, the central bank predicted the annual inflation rate to hit 0.3 per cent for the same quarter before climbing back up to 1.9 per cent at the start of 2016.

The latest Statistics Canada estimate found the annual inflation rate was 1.5 per cent in December.

Cote’s remarks Thursday came as the Bank of Canada prepares for its next scheduled interest-rate announcement on March 4.

The central bank surprised markets in January by cutting its key interest rate to 0.75 per cent from one per cent. Bank governor Stephen Poloz said the move was needed as insurance for the “unambiguously negative” impact that falling oil prices will have on the economy.

“That (interest-rate) decision will be based on a careful examination of how the economy, and the risks, are evolving,” Cote said.

Many analysts are expecting the bank to shave another quarter point off the trend-setting rate in a couple of weeks.

“While Cote cited the potential for negative inflation more as a risk than a certain eventuality, the talk about a dip below zero could further reinforce already entrenched expectations of a further cut on the March 4 decision date,” CIBC senior economist Peter Buchanan wrote in a note to clients.

The price of oil has fallen sharply since last summer when it traded for more than US$100 a barrel. The benchmark price has been around US$50 in recent weeks, but dipped below US$45 last month.

Cote listed positive offsets from the current conditions such as a stronger U.S. economy and the weakened Canadian dollar, which is expected to help exporters. But she noted many of the negative effects on growth by low oil prices have been swift.

There are fears in Europe of deflation, which can be destructive for an economy and can be a difficult cycle to escape.

As the costs of goods and services start to fall, deflation can encourage consumers to hold off making purchases with the expectation prices will tumble further.

OTTAWA — The Bank of Canada says it’s prepared to take action to help navigate the economic uncertainty tied to low oil prices as experts predict it could once again cut its trend-setting interest rate.

Senior deputy governor Carolyn Wilkins made the remarks in a speech Tuesday — as many observers expect the central bank is preparing to drop its rate even further next month.

The Bank of Canada blindsided markets in January by lowering its overnight rate to 0.75 per cent from one per cent.

At the time, governor Stephen Poloz said the cut was needed as insurance for the “unambiguously negative” effects of plummeting crude prices on the oil-exporting country’s economy.

In prepared remarks of her speech Tuesday, Wilkins said the central bank has the ability to move the inflation rate back up towards its two per cent target.

“If potential output growth turns out to be lower than we think, we have the tools to bring inflation back to target,” said Wilkins, who expects the Canadian economy to grow with help from the lower loonie and a stronger U.S. economy.

She predicted Canada’s non-energy sector to lead the growth.

“Monetary policy is contributing to this effort by providing an environment of low and stable inflation, while supporting the adjustments needed to return the economy to sustained and balanced growth,” she said.

“We’ll get there and it will be a very good thing for Canada.”

Wilkins also indicated the central bank is monitoring job-market concerns, such as the low average number of hours worked and the high rate of involuntary part-time workers.

She said “prime-age” workers between 25 and 54 years old and young people between 15 and 24 years old remain underemployed.

The participation rate of prime-age workers in the labour force fell “substantially” last year, while the average duration of unemployment has been hovering close to its post-financial-crisis peak of around 21 weeks, Wilkins added.

“That is a long time to be unemployed,” she said in the prepared speech titled, “Minding the Labour Gap.”

“Setting the right monetary conditions, in the context of our inflation targeting regime, is the best thing we can do for the labour market.”

Spurred first by the oil-price plummet, and then a surprise Bank of Canada interest-rate cut, the main federal party leaders have been testing out their economic policy pitches. There’s still plenty of time for fine tuning and fleshing out those messages before this year’s election is on for real—likely as scheduled this fall, although a spring vote isn’t out of the question—but the themes favoured by all three are fast coming into focus.

“We live in an age of volatility,” Prime Minister Stephen Harper said at an event in St. Catharines, Ont., after announcing the expansion of a federal small-business financing program. Don’t expect Harper to play down the jitters. He’s hoping voters uneasy about the outlook will be inclined to cautiously stick with the governing party, rather than give somebody else a chance. So cheap oil, he said, is “creating some shocks that will impact us but they’re not going to throw us off our fundamental growth path.”

Finance Minister Joe Oliver says that promised tax cuts will proceed, federal spending won’t be cut, and yet the books will somehow be balanced this year. A forecast this week from the parliamentary budget officer suggests that’s just possible, assuming Oliver dips into his $3-billion contingency reserve in the delayed budget he’s slated to bring down in April. Failing to credibly claim to have balanced books, as Harper has repeatedly pledged, would make it much harder for him to maintain his steady-hand-on-the-tiller posture into this year’s campaign.

“The middle class continues to pay the price for our last recession,” NDP Leader Thomas Mulcair said in a speech to the Economic Club of Canada in Ottawa. As always, the challenge for an NDP leader is to persuade voters his party’s economic policies are mainstream, not lefty experiments. The words “middle class” are, at least in part, code for “mainstream.” So Mulcair frames his proposal for expanded government-supported daycare as a boon to ordinary families. He even pledged to cut the tax rate on small businesses, perhaps in a bid to offset the NDP’s historic association with unions.

Arguably more important for Mulcair, though, is turning his economic prescription into a sort of personal narrative. After all, he’s already seen as politically skilled; his weakness is a failure to personally connect. Thus, he presents his pro-middle-class message in biographical terms. “It is a fundamental part of who I am,” he said. “My family story is that of millions of Canadian families. Growing up the second oldest of 10 kids, we had to work for everything we had. It wasn’t easy. We worked hard, played by the rules and lived within our means.”

“Oil prices are through the floor and Mr. Harper has no backup plan,” Liberal Leader Justin Trudeau said in a speech to the party faithful in London, Ont. The line and the location are closely connected: Trudeau’s Liberals must pick up dozens of seats in Ontario to win the next election, and a big part of his appeal to those voters in the manufacturing heartland is that a PM from Calgary has been neglecting them out of fervour for Alberta’s oil patch.

Trudeau has been the least forthcoming with clear platform planks in this very early pre-election stage. There’s plenty of precedent for that strategy, including, in 2005-06, Harper’s own holding back of the main Tory policy pledges until the campaign was officially launched, which resulted in his breakthrough win. Until Trudeau starts unveiling more of his own ideas, his core task must be to undermine Harper’s credibility—especially in Ontario. “Mr. Harper’s economic vision neglected the things that have always made Canada prosperous: diversity, balance, and partnership between regions and sectors,” Trudeau said.

What’s in the window is clear: Harper as the safe choice, Mulcair as an ordinary guy, and Trudeau as a restorer of balance. What are Canadians buying? That answer can only come on election day.

ST. CATHARINES, Ont. – Prime Minister Stephen Harper is playing down the significance of the Bank of Canada’s surprise interest rate cut, saying his government is sticking with its plan to introduce tax cuts and balance the books.

Harper made the remarks during a visit Thursday to a custom picture frame company, where he announced enhancements to the Canada Small Business Financing Program.

On Wednesday, the bank shocked the financial and political world when it announced a quarter of a percentage point drop in the trendsetting interest rate.

The bank linked the decision to the plummeting price of oil, which it said “will weigh significantly on the Canadian economy.”

Opposition leaders seized on the announcement to suggest the Conservative government has bungled its economic policy, particularly by earmarking billions for measures like income splitting for families with children.

Harper emphasized that the economy is still expected to grow, albeit much slower. The Bank of Canada predicted growth would slow to 1.5 per cent in the first half of the year, and gradually pick up steam.

He dismissed the suggestion that his government might change course in view of the price of oil, and said he remains committed to balancing the books.

“Keeping our taxes low and having sound public finances — this is the formula that has made the Canadian economy one of the most stable and solid in the world,” Harper said.

“It’s the formula that’s given us 1.2 million net new jobs in a time of incredible volatility. So we’re going to continue on that general course.”

The changes to the small business program will allow companies with gross annual revenue of $10 million or less — up from $5 million — to apply. They can borrow up to $500,000 each.

The changes will allow entrepreneurs to borrow money to buy or improve land or buildings.

Harper and the other federal leaders have been spending much of their time of late in southwestern Ontario, an area that will be key in deciding who forms the next government.

It’s on days like this when the Playbook basically writes itself. The major stories today are both at home in Canada and in Europe, as the analysis continues for the Bank of Canada’s surprise rate-cut yesterday, as the European Central Bank announces long-awaited qualitative easing.

First, a look at some of the commentary from the Bank’s announcement, including from the Maclean’s economic panel, and then a look at the European Central Bank’s meeting (updated.)

The Bank of Japan also made its monetary policy announcement today after a two-day meeting, and real GDP numbers (by industry) will be out for the U.S. this morning. Plus, the World Economic Forum continues today, and you can prep with Scott Gilmore’s take on the big debates, discussions, and of course, parties.

Surprise, surprise! By now you know that the Bank of Canada cut its interest rate by a quarter of a per cent to 0.75 per cent – the first change since September 2010, when the rate was set at one per cent – and, by all accounts, a fairly massive surprise. Yesterday, the discussion was mainly over expectations that a rate hike would be pushed back as the true impact of oil’s fall becomes clearer, but the Bank had something else in mind, as governor Stephen Poloz declared the drop in oil prices is “unambiguously negative for the Canadian economy.”

The drop clearly indicates the Canadian economy is probably in for a rougher ride than expected, but it leaves all kinds of other questions. Just last year, Poloz said some of the greatest risks to the economy were a housing market that might be overvalued by as much as 30 per cent, and unsustainable rates of household debt. If this drop is expected to cushion the impact of the oil rout, especially on western Canada, it’s not clear how it could impact the housing market, especially in Toronto and Vancouver, where prices are still hot, hot, hot (in Calgary … not so much). It’s a continuing tale of the “two economies” – the oil economy and the manufacturing economy (or, if you like, Alberta vs. Ontario). As Maclean’s John Geddes says, the political implications are huge. If we’ve seen an unbalanced picture across the global economy –the U.S. vs. the rest, for one – it shows that Canada is certainly not immune. The move had an immediate affect, with the loonie dropping a cent and a half by closing, and the TSX/S&P Composite Index getting a boost of more than 250 points.

There’s lots to read on this – for your first stop, head over to a Storify chat of Maclean’seconomics panel, which includes Mark Brown (managing editor of Canadian Business), Romana King (senior editor at MoneySense), and economists from Western University and the University of Alberta. Among other things, you’ll get some good insight into how this will affect your finances.

What does this mean for Australia? No, really. As the FT points out, after the Bank of Canada announced their cut yesterday, the Australian dollar dropped by more than one per cent – and there’s a connection. Canada and Australia, after all, are kind of the same place, if you just replace snow with year-long sunshine, and both have had commodity economies battered in recent events: here, the price of oil, down under, the prices for metals. The majority of analysts don’t think a rate cut is imminent from the Reserve Bank of Australia – but ahem, surprises happen – and the question was last on the table in December, as Oz contemplated the impact of falling demand from China and slowing inflation.

Go-time for the “quantitative easing bazooka” (update below.) Today’s the day, after months of speculation on whether Mario Draghi and the European Central Bank (ECB) will kickstart a massive bond-buying program to stimulate the eurozone economy. The general prediction is that the ECB will announce 550 billion euros worth of stimulus (almost $790 billion Canadian), purchasing bonds at a set amount every month. Also watch for whether the ECB will set a target for when QE could stop – the U.S. and the U.K. both set inflation targets for their stimulus plans. Besides the debates about whether QE will even begin, and how much, there are questions about how the risks would be shared, as well as uneven enthusiasm among national central banks – Germany has been particularly reluctant.
Another concern is whether all the speculation over QE could be a risk in and of itself. At the FT, John Authers notes that a build-up comes with a risk that the policy won’t pack the desired punch. Central banks know this, and have often been strategic in surprising markets – from the Bank of Canada’s announcement this week, to the Swiss Central Bank’s currency surprise last week. Then, there’s the greater question of whether QE is too little, too late. But let’s save that one for tomorrow.

Update: The ECB unleashed a surprise of its own this morning, when it announced a quantitative easing program that was even bigger than expected – at a rate of 60 billion euros a month (about $86 billion Canadian.) Mario Draghi said the program would begin in March and continue until September 2016, or whenever inflation hits the two per cent target (whichever comes first.) The move prompted a big jump in European markets, even as the euro fell to another 11-year low and bond yields fell. We’ll have a more in-depth look tomorrow.

A big bill for Target. The American retailer is facing billions of dollars in debt as it prepares to wind-down its stores in Canada, which will require laying off more than 17,500 employees. The chain owes the Canada Revenue Agency more than $12 million, and owes millions to various suppliers including Warner Bros., Starbucks and Sobeys. For Maclean’s, Chris Sorensen dissects the roll-back in light of signs of a slumping Canadian economy, noting: “What’s surprising about Target’s Canadian misadventure isn’t that it ran into unforeseen problems. It’s that it didn’t think there was any point in trying to fix them.”

Deflation-weary Japan downgrades their inflation target. In other Central Bank news, Japan released a fairly optimistic monetary report this morning – but acknowledged inflation isn’t going to hit the two per cent target any time soon. Japanese PM Shinzo Abe has based his “Abenomics” on beating long-running deflation, but since slowing prices seem to be a global trend, he’s not been having much success. Nonetheless, the Bank has left their quantitative easing targets (set almost two years ago) as is, and have expanded incentives for domestic banks to lend.

TORONTO – Canadian homeowners have likely gained a reprieve from an expected increase in mortgage rates this year.

Economists say rates will dip slightly in response to the Bank of Canada’s surprise move Wednesday to cut its trend-setting interest rate to 0.75 per cent, from one per cent, to soften the blow of dropping oil prices on the Canadian economy.

“This signals that low interest rates will be with us a while longer,” said Avery Shenfeld, the chief economist at CIBC World Markets, noting that the central bank’s rate cut will likely mean a corresponding 0.25 drop in variable, or floating, mortgage rates.

Fixed-rate mortgages are also likely to see a slight decline, as they follow bond yields, which will move lower in response to the rate cut.

It was anticipated that the Bank of Canada would move to increase its overnight rate later this year due to an improving economy, until crude prices started to slide and dropped below US$50 a barrel.

Phil Soper, president of realtor Royal LePage, said Canadians could be shopping for cheaper mortgages within days.

“It doesn’t take long to react to a policy change like this,” Soper said. “That’s why it’s such a powerful tool.”

A conventional five-year mortgage stands at about 4.79 per cent, according to data from the Bank of Canada.

Decreased mortgage rates are likely to boost sales and prices of homes in Central Canada, including in Toronto’s red-hot property market, where Soper predicts prices could climb by 4.5 to five per cent this year.

“It will be a lift to the industry overall,” Soper said. “However, it will be particularly pronounced in Central Canada, which we believe will see a lift from lower oil prices regardless and, when you add to it the stimulative impact of lower mortgage rates, we should see an uptick in activity.”

However, the rate cut may also spur Canadians, who have been criticized previously by the Bank of Canada for holding record levels of debt, to borrow more money.

“Certainly this isn’t going to discourage anyone from taking on debt,” Shenfeld said.

“But I think in the Bank of Canada’s eyes right now, it’s a lesser of two evils. They’ve shown discomfort with the amount of borrowing Canadians have done, but the economy right now can’t afford to shut the tap off on that if we’re not getting the lift to growth from the energy sector.”

Although cheaper mortgage rates are likely to buoy real estate markets in Central and Atlantic Canada, TD economist Craig Alexander says the impact of oil prices will trump interest rates in Western Canada.

“I think it’s inevitable that you’re going to see a pullback in sales and a softening in price growth in real estate in oil-rich provinces because, at the end of the day, income growth in those provinces is going to be a lot less,” Alexander said.

“It is an economic shock, and real estate markets do reflect local economic conditions.”

In its latest report, Royal LePage predicted home prices in Calgary would grow by 2.4 per cent this year – a slowdown from the 5.5 per cent jump they made last year.

Meanwhile, older Canadians who rely on interest-bearing investments for their income could find themselves squeezed as a result of the central bank’s policy change.

“It will push them into looking at alternative investments that can generate a bit more yield than a straight GIC,” Shenfeld said.

With oil prices experiencing a dramatic decline, the Bank moved to lower interest rates in hopes of reinforcing the national economy. “This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada,” the Bank said. “The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon.”

The Canadian Press tells us five things to know about today’s announcement:

— The Bank of Canada believes low oil prices are overall negative for the Canadian economy.

— By cutting its target for the overnight rate, the central bank is trying to push down the interest rates charged by Canada’s big banks, making it cheaper for companies to borrow money to grow their businesses.

— A rate cut by the central bank likely means lower interest rates for variable rate mortgages, lines of credit and other loans based on the prime rate, likely to boost consumer spending.

— The loonie immediately fell by more than 1.5 cents against the U.S. dollar. A lower dollar makes Canadian goods cheaper for U.S. buyers, helping to stimulate exports but increasing the cost of imports.

— The Bank of Canada used an estimate of US$60 for the price of oil in making its decision. Oil is trading below US$50 today. If oil stays where it is the central bank expects the economy to grow even slower than it has forecast.

Bank of Canada governor Stephen Poloz’s surprise interest-rate cut today has economists and market players scrambling to adjust their assumptions, but political strategists must also be trying to figure out how the economic news changes the equation for a 2015 federal election.

After reducing the central bank’s so-called overnight rate to 0.75 per cent—the trend-setting rate had been stuck at one per cent since September 2010—Poloz held a news conference just off Parliament Hill. To my ear, the key part for political calculations was his handy summary of the separate tracks he expects Canada’s “two economies” to travel along for the rest of this year.

It goes without saying that the plummet in oil prices is what prompted Poloz’s interest rate move. The bank says the decline with “weigh significantly on the Canadian economy.” But, as he later explained, really only the oil economy, and, he predicted, only for the first half of the year. Here’s what he said:

“The layoffs in the oil sector won’t be offset by enough growth in other sectors for awhile. But we think the positive trend is under the surface, that things are getting stronger. So in the second half of the year we’re going to see that emerge from this much more strongly.”

Assuming that Prime Minister Stephen Harper wants to face the voters when the economy feels like it’s on an upswing, then Poloz’s two-act scenario for the economy in 2015 argues strongly for the Tories sticking with a fall campaign, as dictated by Harper’s not-so-binding fixed-election date law, rather than seeking, as some have speculated he might, a pretext for going to the polls in the spring.

Poloz went on to highlight what is now conventional wisdom, that the slump in the oil sector will be offset by a rise in other parts of the economy—notably manufacturing exporters in (as we in Ottawa are prone say) vote-rich Ontario. Here’s how he conveniently sketched the outlook:

“It’s important to keep in mind that it’s really like there’s two economies. Like we’ve had for the last few years—there’s a really strong energy economy and a relatively lacklustre non-energy economy. Two speeds. And now what we have is that the speeds will get closer together; one’s rising and the other one’s falling. But the immediate part is the fall, the oil price part, and the rest is just gathering momentum.”

The political question that arises here is whether Harper, who is so closely identified with the Alberta oil economy, can now link his brand to that other economy, especially the Ontario manufacturing sector, sufficiently that he gets some credit from voters, if Poloz proves right and they have reason to feel more upbeat by next fall.

The aim of the opposition parties, meanwhile, has to be to deny Harper any credit, should the non-oil part of the economy show the buoyancy Poloz predicts by election time. We heard Liberal Leader Justin Trudeau trying to do just that yesterday, in a speech to Liberals in which he painted the Prime Minister as having had no economic strategy beyond pumping fossil fuels. “Oil prices are through the floor,” Trudeau said, “and Mr. Harper has no backup plan—none.”

Let’s say Poloz is right. Next fall the economy feels fine, except in oil country. Will Harper benefit? Or will voters decide the upside is none of his doing? It could be the judgment call the decides the election outcome.

OTTAWA — The looming threat of sliding oil prices forced the Bank of Canada to drop its trend-setting interest rate Wednesday, a surprising move that shows just how much the country’s economic outlook has soured in a matter of months.

The central bank, which nudged its key rate down to 0.75 per cent from one per cent, said the rapid oil-price collapse has created many unknowns around economic growth in the oil-exporting nation.

Until the effects of oil’s late-2014 tailspin started to trickle through, Canada appeared to be on the cusp of a promising post-recession rebound _ and inching closer to a rate hike.

“The large decline in oil prices will weigh significantly on the Canadian economy,” the Bank of Canada said in its quarterly monetary policy report, which it also released Wednesday. “Given the speed and magnitude of the oil-price decline, there is substantial uncertainty around the likely level for oil prices and their impact on the economic outlook for Canada.”

The loonie dropped 0.94 of a cent to 81.66 cents US — its lowest level since late April 2009 in the wake of the announcement.

The decision marked the first time the overnight rate budged in either direction since September 2010.

The Bank of Canada was widely expected to once again stand pat on its rate Wednesday, with most economists projecting an increase in late 2015 or early 2016.

The central bank, however, predicts the impact of falling oil prices to overshadow encouraging signs of economic life spotted outside the weakening energy sector, such as rising foreign demand, a boost in exports and job growth.

“The oil-price shock is occurring against a backdrop of solid and more broadly based growth in Canada in recent quarters,” the bank said.

“While business investment had been showing some encouraging signs in the third quarter of 2014, the near-term outlook appears much-less positive.”

The bank also said the oil-price drop will have an adverse effect on income and wealth, which would reduce the growth of domestic demand. It also expected additional negatives on consumption and public finances.

The rate decrease aims to soften the blow of cheaper crude.

The Bank of Canada said lowering the rate was intended to “provide insurance” against risks posed by low oil to the country’s inflation and its financial stability.

It predicted Canada’s fortunes to also receive a boost from the ever-strengthening U.S. economy, an country expected to benefit from lower crude prices.

The bank’s concerns over the oil slump come as some Canadian industries reel from the sharp plunge in crude prices, which are down more than 55 per cent since June.

The decline in oil prices is also expected to shave billions of dollars from the bottom lines of federal and provincial governments.

Last week, the federal government took the rare step of delaying the budget until at least April, so it could assess the effect of tumbling crude.

In November, federal Finance Minister Joe Oliver warned falling oil prices could cut $2.5 billion per year from the federal books between 2015 and 2019. Since that calculation, the price of crude has tumbled even further, from about US$80 per barrel to under US$50.

Experts believe the federal books for 2015-16 will come close to running another deficit, despite the Harper government’s assertions it will deliver on its long-held vow to balance the budget.

An analysis Tuesday by the Conference Board of Canada predicted plummeting world oil prices to gnaw $4.3 billion from the Canadian government’s 2015 income and deliver a nearly $10-billion hit to the provinces in royalties and tax revenue.

In the monetary policy report Wednesday, the central bank predicted the country’s headline inflation rate to temporarily dip to one per cent — below the bank’s target range — before climbing back up to two per cent in the second half of the year.

The central bank also highlighted persistent problems in Canada’s labour market, where it found long-term unemployment was still close to its “post-crisis peak.”

It said average hours worked remained low and the proportion of people who could only find part-time work was still high.

The bank predicted the pace of Canada’s economic growth — measured by the real gross domestic product — to slow to roughly 1.5 per cent in the first half of 2015 and for the output gap to widen.

It projected the Canadian economy to gather steam in the second half of the year, allowing real GDP growth to average 2.1 per cent in 2015 and 2.4 per cent in 2016.

The bank’s estimates were based on oil prices of US$60 per barrel, which is higher than current prices that are below US$50.

The report said if oil were to remain close to US$50, real GDP growth would dip to 1.25 per cent in the first half of 2015.

In its last monetary policy report — in October — the Bank of Canada predicted 2.4 per cent growth for 2015.

Since then, oil prices have dropped by more than 40 per cent.

In his October report, bank governor Stephen Poloz warned the extended period of an already-low interest rate of one per cent had propelled consumer spending to near-record-high housing prices and debt.

At the time, Poloz cautioned the low-rate environment had left Canadian households exposed to economic shocks.

On Wednesday, the bank reiterated the warning that Canada’s indebted households remained vulnerable.

A fresh unknown — the oil collapse — has now been added to the mix.

“The precise magnitude of the impact of the fall in oil prices on household income, spending and, ultimately, on existing imbalances is highly uncertain,” said the report, which still maintained its prediction of a soft landing for the housing market.

The Bank of Canada is scheduled to make its next interest-rate announcement March 4, while its next monetary policy report is due April 15.

It’s a busy day in Canada today, with the Bank of Canada’s update on the economy. To the south, numbers are expected on the American housing market, with housing starts and housing permits out today – but the big news will be follow-up from Obama’s State of the Union address last night, where he focused on policies to even out the vast gap between the wealthy and the middle class.

On the world stage, today marks the official start of the World Economic Forum in Davos – though the forum has been making headlines all week – and the frenzied pre-cursor to the European Central Bank’s meeting tomorrow, which is widely expected to come with news of quantitative easing for the sluggish eurozone economy. European markets are treading gingerly this morning, and questions linger on whether QE, a vast bond-buying stimulus used by the U.K. and the U.S., will actually work.

The Bank of Japan and Brazil’s central bank are also meeting.

The Canadian economy gets a check-up. Today marks the Bank of Canada’s update on their forecasts for growth, as well as an interest rate update. The interest rate is expected to remain at one per cent – where it has been since 2010 – but there are rising questions about how the oil rout is affecting the economy at large, and whether expectations for a rate hike could now be pushed back (or whether the rate could even be cut.) Last year, the Bank’s governor, Stephen Poloz, warned that household debt and housing prizes presented the primary risks to the economy and international events representing the biggest risk over all. But falling oil prices have already begun to rout revenues for oil-patch companies, as the federal government puts off announcing the budget, so the Bank’s take makes today a day to watch.

The loonie takes a dive. The dollar dropped more than a cent yesterday, as weakening manufacturing numbers were released in the lead-up to the Bank’s policy announcement. The dollar lost 1.1 cents, settling at 82.6 cents, which puts the loonie at a more than five year low.

Manufacturing sales slip, wholesale numbers out. Yesterday’s release of manufacturing numbers for November saw sales fall by 1.4 per cent – a steeper than expected drop. The slowdown was fairly widespread, across 16 of 21 industries, with the sales slowest in chemicals and auto sales, down by 5.9 per cent – erasing gains the previous two months – as inventories inched down and unfilled orders increased.
Today will see wholesale sales numbers for November. October’s sales increased for the second month in a row, with strong sales in farm products outweighing a decline in household and personal goods. But estimates expect December to see a decrease in sales.

The rumours about Blackberry are true – sort of. Remember last week when Blackberry shares spiked, on a report from Reuters that Samsung was going to buy the beleaguered smartphone maker? While both companies ended up denying the claims, yesterday Samsung said there’s some truth to tales of a partnership: the company is interested instead in expanding their use of Blackberry software, known which is known for being particularly secure. One of Samusung’s work systems already runs on Blackberry servers.

Netflix goes global. The movie streaming service is already international, but plans to expand the company to 200 new countries by next year would mean almost anyone can spend Saturday nights binging on movies. Netflix says it’ll fund the expansion by raising $1 billion in debt, as shares jumped 15 per cent in after-hours trading. The company expanded to 50 new European markets last year, and the “first wave” of international markets – including Canada – are now profitable, as the service has found success with custom TV shows like Orange is the New Black. But the bulk of the market is still in the U.S., where investors have worried that slowing subscriber growth and high licensing costs could slow the service down.

As governor since June 2013, Poloz has held the lever of interest rates at a difficult time for the economy. Now, he is cautiously optimistic that stronger growth is taking hold.

What’s your greatest concern about the economy?

My biggest concern remains the issues that are outside of Canada. We’re just a small place in a big world, and it just seems like, every day, something new is happening that has the potential to affect us. I don’t want to sound overly gloomy, but, since you asked what worries me, it’s the international repercussions and how they affect our export sector, which is the backbone of the Canadian economy.

Okay, so what gives you hope?

What gives me hope is that the U.S. economy has done the hard work of resolving things after [the financial] crisis,and that means businesses are starting to invest again. That’s important to us, because investment is a very trade-intensive business, so we supply a lot of that machinery and equipment. So the lower dollar and the return of the U.S. [are] two things working together to give us a much more encouraging outlook.

It’s seemed as though, each time Canada was gaining traction, something bad came along, whether it was bouts of low inflation or weak job growth. Now, it’s oil prices.

Well, oil prices are a pretty big thing for us. Being a net exporter, we are one of the economies that would be a net loser. That reduces the amount of income that’s flowing into Canada, and quite significantly so. At the same time, it will strengthen economies such as the U.S.’s. Even if the exchange rate is offsetting some of it, and the U.S. economy is a bit stronger, there will be a net negative effect for us. We speculate [that] if the prices stayed where they were, [we could lose] perhaps as much as a third of a percentage point [of GDP], but we’ll do harder work on that over the next few weeks and, when we do our next monetary-policy report, there’ll be a lot more detail on it.

Do you see this as a drop in price similar to that of 2008, which was relatively short-lived, or something like we saw in the ’80s and ’90s, i.e., a prolonged slump?

That’s a hard choice to make at this stage. We know the world economy is underperforming, [but] a good percentage of this drop is really due to excess supply. As a consequence, it’s more likely to be longer than what we saw in 2008. But, of course, lower prices usually would mean a little less investment, and it’s like any other economics problem: It kind of catches up to itself. We wouldn’t expect $60 or $70 to be some sort of equilibrium for a long time, because the cost of producing each barrel of oil in many parts of the sector is higher than that.

You’ve talked about Canada’s two-track economy, that one track has been driven by the resource boom. Might lower oil prices mean the Canadian economy might have to switch tracks? And it is that second track, the manufacturing-driven, export-driven economy, ready to pick up the slack?

Well, your supposition is correct, presuming it lasts long enough to actually get those gears moving in that way. And as we mentioned earlier, lower oil prices have brought with them a lower Canadian dollar and that comes as positive news to manufacturers, let’s say, in Ontario or Quebec, who have been under stress. So the resource side has been faster and the manufacturing slower, and you’d expect to see less of a gap. But we should bear in mind that the terms of trade—this is, you know, the result of all the commodities that we produce and our net exports in them, not just oil, but other things—have come down, [though] they’re still much higher than they were, say, 10 years ago. So that terms-of-trade effect is still working its way through, people are still making investment plans based on that, and so I think two-track is probably going to remain a feature. But at the moment I’d say that the gap between them would narrow, and that’s of course a more balanced type of growth, which would be welcome, I think, to most people.

Some economists have complained that you tend to overlook positives in the economy, implying that you look for negatives to justify keeping rates low. Why do you think that perception exists?

Given what we’ve been through and the process of serial disappointment, it’s natural to be more concerned about the downside than the upside. Even though the U.S. has had strong growth the last while, you’d have to say, “Yeah, but it’s with interest rates at zero. What would you expect?” What you’d expect is we would have had fast growth a long time ago, and it hasn’t happened. From a policy-maker’s standpoint, if we’re wrong about our outlook in the economy, if inflation would begin to creep up sooner, we know exactly what to do about that. If we’re wrong the other way and inflation resumes its down trend, we have very few tools left to take care of that. So I think it’s natural for someone like me to talk a lot more about those negatives, and not dismiss the positives, but say, “Well, I need to see four, five or six of those in a row to be convinced that I don’t have to worry as much anymore.”

Mark Carney and Jim Flaherty used to talk about the housing market and indebtedness a lot more than you and Finance Minister Joe Oliver do now. It seemed to be a big macro risk at one point, and now it seems to be something kind of on the back burner. Why is that?

Well, I would say we’ve made some advances in methodology. In our last financial-system review, we introduced an entirely new methodology, and what’s key to that is we talk about vulnerability, as opposed to risk. How I would characterize the situation in the housing market right now would be that there’s been excessive buying. But if there were a downturn in the economy, and unemployment rose, or if interest rates went up suddenly—bond rates, not short-term interest rates—then that could put the housing market at risk. But the vulnerability is worth analyzing all the way and, if you say, “Well, there’s no catalyst,” it’s okay. So we don’t expect interest rates to go up a lot, or fast; we aren’t predicting another recession. We say, “Well, those risks are more remote, but the vulnerability is elevated,” and that changes the tone of that conversation. They have not gone to the back burner; we spend a lot of resources on monitoring developments in the financial system, and we don’t have a policy discussion without reviewing all of that.

You know, in Vancouver, the only detached house for sale under $600,000 is a houseboat. Do you see a problem?

I acknowledge that that’s expensive for a house, but I’m old enough to be able to say that for my entire adult life, it’s been expensive to buy a house in Vancouver. When I was in my 20s, I would say, “Wow, it’d be nice to live in Vancouver,” but I could never afford it. And I think that that’s got to have something to do with Mother Nature: where Vancouver is, what it offers. So I think we have to set that aside and ask, “Well, what about housing in general?” That’s really the way to look at it, as a macro phenomenon. House prices are elevated relative to incomes. That’s a natural consequence of what we’ve been doing, which is to try to boost the economy, to offset the headwinds from the world with low interest rates. No one believed it would take this long, and, therefore, those things have accumulated on us. We have to continue to monitor it.

Obviously, a lot of people—including myself—care about this issue. It’s a very common issue among all major economies. What monetary policy can do is use all of its tools to get the economy back on a sustained track. When confidence is re-gathering its strength, you’ll see companies investing in new capacity and new companies emerging, which create the lion’s share of new jobs in our economy. So making sure those conditions are creating those sustainable jobs, that’s what we’re here for. Youths have a harder problem when they come out of school and there isn’t a good job market because they can’t really get that first experience, and that’s hard to manage, I understand that totally.

So it’s still the same view, just . . .

Well, you know, that’s the macro picture as we describe it, and I totally sympathize. Everyone should know that everybody is doing the maximum that we can, and I think that the headwinds that are holding back the economy—the global ones—on glance seem to be dissipating, primarily in the U.S. A couple or three months of decent job creation is not much, and the hours worked in the economy have only risen 0.4 per cent in the last 12 months. That means that a lot of the growth we’ve had is in part-time work, and a lot of people would say, “I’d rather work full-time,” so this isn’t quite what I’m looking for. So all of those things suggest that if you’re working part-time and you have some sort of a volunteer role with a non-profit, those are not bad things to have on your CV. But I would never consider volunteering for something to be a substitute for a full-time job.

We’ve got Boomers leaving the workforce and employers demanding skilled workers. Why can’t we transition from one generation to the next in the job market?

You’re describing it as a structural problem, and I don’t think I would. In a structural sense, we know the Baby Boomers are on the verge of retirement, and it means that young people are going to have lots of opportunities. But we have to layer on top of that this big cycle—and a long cycle—that happened from the [financial] crisis. Most business cycles will only be a couple of years long. You have a recession, so people cut back production, lay off your workers, so you become unemployed. Six or nine months go by and then you’re called back, right? So that’s typical. When it’s a long one and a slow one—and in our case the dollar went up at the same time—it actually destroyed some capacity in the economy. Those jobs are actually gone, and what we have to do now is wait for them to be recreated. You have to wait for somebody to say, “Yeah, I’m ready to expand my business and create another 30 jobs,” or, “I’m ready to start a brand-new business.” That process has been slow to get restarted.

At some point between 2015 and 2020, we’ll have more seniors than children in Canada. Growth is going to be slower. Do you see it as the job of monetary policy to make up for that lag, or is that something we just have to accept?

No, it is something we’ll have to accept. It’s easy for us to forget there was a baby boom, because it lasted for 50 years. So that has boosted our growth rates in many countries around the world, and now we’ll settle down into a slower trend.

What is it going to mean for monetary policy? The retirement of Boomers is a decades-long process. Are we looking at that kind of a time frame, too?

Yes, for the foreseeable future. What it means is a lot of things, [including] lower economic growth. As we see that unfold, the neutral rate of interest will be drifting down. Growth is going to slow to around two per cent and interest rates will follow that down, so that becomes the destination [for rates], since we’re more or less at zero or one per cent [now]. Where interest rates will settle will be at a lower number than we were used to five, 10 years ago. When will interest rates go up? Well, I’m not sure. But how far will they go up, that’s an easier question to answer, and the answer is not nearly as far as we thought from the previous cycle.

What happens when rates do rise given the level of indebtedness that Canadians have?

Well, no doubt the Canadian economy would be more sensitive to a fluctuation in interest rates today than it was before the crisis, precisely because we’ve put some more debt on our books. At this stage, we really don’t know the answer to that question. We can make some educated guess but our models are based on, say, the past 30 years of average, and all we’d know is, “Well, it’s going to be more sensitive than it was before.” But that’s all tied up with this thing I just described, the [lower destination of interest rates], because if you’re not going to go nearly as high, say in five years or whenever interest rates are going to be back to a steady state, that’s okay because you’ve got more debt to service, right? And so I think that it all works out in the end.

We’ve talked about how much indebtedness there is. That makes people vulnerable to a downturn in employment or a sudden rise in interest rates, neither of which, as I said before, we’d be expecting. But, of course, vulnerable in a sense that if interest rates were to go up half a point, that would cost people some money, but it’s not much in the big picture. And debt service is a reasonable share of people’s incomes, despite everything that has gone on. So, in the end, as the economy gathers strength, when we get those jobs we talked about, all those parameters are going to look better, the sustainability of those debts will look much better.

You know as well as anyone the risks of keeping interest rates too low too long. Given that we’re now at a point where rates have stayed at the same level for the longest time since the Second World War, how long is too long?

We don’t know. That’s the honest truth. I could be a little more precise than that, that’s being cute. But I think that if we look at, say, the level of [household] debt right now, 165 per cent share of income, there are other countries with much higher numbers than this. So you don’t really have a metric for deciding what is too long or too high. And I’ll give you a for-instance: we know that people who grew up in the Great Depression—like my parents—were very anti-debt. If they had a mortgage they were paying it off as fast as possible. My generation grew up more in the ’60s and ’70s, a higher inflationary period, and for maybe that reason they think [debt is] okay. And then my kids are more likely to say, “I don’t really want any debt.” And that’s what we kind of see in the broad picture. So what that means is, as folks of my parents’ age pass away, low-indebted households are being replaced by higher-indebted households in the structure, and so for that reason alone those numbers could keep going up. Plus, the financial system is much safer today than it was five or 10 years ago, not just ours but the world’s. So for all those reasons I’m afraid you can’t just say what’s too long, what’s too much. But what you do is you continue to monitor all that and look deeply and stress-test. Those are good tools to ask, “Is the financial system vulnerable? Is there something, as a central bank, we should be doing? Is there something that we should be doing in a broader policy environment?”

If, three years from now, low rates haven’t had the desired effect, will central banks have to rethink this approach?

There are other tools in the toolkit. We can talk about those things if that comes to pass, but we’re not preoccupied with that at all. I’ve referred to Mother Nature, which is a friendly way to talk about how there are natural forces acting [on the economy], and when we can identify the things holding back the natural forces and watch them gradually dissipate, that encourages us that we’ve got the model right. So I think that that’s the case. But you’re right: If we were still sitting here, talking about the same things three years from now, I think [that], long before that, we would have been talking about some different options. But I really think that that’s not an occurrence.

House prices are high, and the loonie is low – as oil dipped below $65 yesterday for both U.S. and global benchmarks, the TSX sunk, and the Bank of Canada warned (again) of an overheated housing market.

The Day Ahead

Oil heads south of US$65. Oil prices are under $65 for the first time in five years, and despite some small gains this morning, remain between that five-dollar range. Brent lost almost five per cent yesterday alone, bouncing back slightly to close at US$64.24, while West Texas Intermediate ended the day at $60.94. They were both up less than a dollar around 3 a.m. Toronto time.

Big reserves, lowered demand. The price drop was blamed on new information yesterday from both the U.S. and OPEC. Remember when oil jumped last week on a belief that U.S. reserves weren’t as large as expected? That was a red herring – the U.S. Energy Information Administration said Wednesday that the country’s oil inventories actually rose by 1.5 million barrels last week – when analysts had predicted a decrease of twice that amount. Meanwhile, OPEC revised its demand forecast for next year down half a million barrels from 2014, after refusing to cut their production targets in the face of a glut of American oil.

The TSX/S&P Composite Index had its biggest drop in 18 months – breaking a record set on Monday. The index fell 2.4 per cent, or 342 points, on Wednesday on falling energy stocks, leaving the market just 1.7 per cent above where it started at the beginning of the year.
American markets also ended the day down, with the S&P500 and the Dow Jones industrial index both down about 1.5 per cent, though the losses are pretty minor in light of record-breaking gains the last couple of months.
Markets in Asia and the Pacific have had some losses this morning, but are fairly even-keeled, including the notoriously volatile Shanghai composite, while markets in Europe are actually up a touch this morning.

Of course, the loonie is down. The Canadian dollar closed at 87.11, which is still a little higher than it closed on Monday (at 87.09). Oil prices were part of the reason, but the loonie may also have weakened on yesterday’s financial system review from the Bank of Canada, which issued more warnings (albeit fairly gentle ones) about a Canadian housing bubble.

More output, housing, numbers out today. This morning will bring some data from Statistics Canada, including industrial capacity utilization rate for October – the number that represents how well the economy is doing rates relative to its potential. This rate has generally been increasing for the last five years, with second quarter numbers in September at 82.7 per cent.
We’ll also see the monthly housing price index for October, which is especially relevant in light of the Bank’s statements yesterday. This, too, has been on a very steady increase for the last five years. Prices grew 0.1 per cent across the country in September, with the biggest gains in Toronto and Oshawa.

U.S. spending bill, retail numbers, out today. The House of Representatives will look at the $1.1 trillion spending bill today, and while it’s expected to go relatively smoothly, it provides an opportunity to look back on the messy U.S. government shutdown over this same issue last year. As usual, nobody’s that happy about the bill – Republicans are crying foul on immigration, while some Democrats are unhappy about measures they say could weaken financial regulation.

As for the retail numbers, This could be what’s fuelling some optimism in the European markets this morning, after last week’s U.S. jobs report proved to be a market-boosting blockbuster. November is also the heyday of holiday shopping for the U.S., combining Black Friday with, of course, Christmas.

What you missed

Canadian housing prices are overvalued by as much as 30 per cent, according to the Bank of Canada’s financial systems review. The biannual announcement is a rundown of everything that’s worrying the Bank’s governor, and in this case, it focused heavily on house prices and high levels of household debt. The Bank said the housing market is overpriced by 10 to 30 per cent, noting that the anticipated soft landing for housing prices has “not yet” occurred.

The Bank also pointed to Canadians with major debt loads – about 12 per cent of households – as especially worrying. Given the majority of household debt in Canada is in mortgages, that means large numbers of households are vulnerable to a rise in interest rates, expected around next fall.

But plunging oil prices don’t pose a major threat at the moment, according to Bank governor Stephen Poloz. He noted they had downgraded their growth forecast for next year down by only a third of a per cent, according to Bloomberg. Other risks include pains in the global economy, including any reversal in American fortunes, slowing growth in China, and trouble in the eurozone.

Low-income numbers for 2012 came out yesterday, released as part of the new Canadian income survey. Because the data can’t be compared to other years, its use is limited – but it does give some tidbits about income disparity across the country. That year, 13.8 per cent of households across the country were considered low income, though rates were much higher for children living in one-parent homes headed by a woman (almost 45 per cent of such households), and for seniors living alone (28.5 per cent). Median after-tax income was the highest in Alberta, for both couples and people living alone.

Inflation rates floating lower across the eurozone. Monthly numbers are coming out for several European countries this morning. So far, France, Germany and Sweden (which uses the krona, not the euro) have reported national inflation at or below 0.5 per cent for November. The new numbers will ramp up pressure on the European Central Bank to stave off deflation in 2015. The central bank is already giving ultra-low loans to banks to try to prod them to offer more credit to small businesses.

]]>http://www.macleans.ca/economy/house-prices-too-high-as-oil-heads-south-of-65/feed/2Bank of Canada: Housing may be overvalued by as much as 30 per centhttp://www.macleans.ca/economy/economicanalysis/bank-of-canada-housing-market-could-be-overvalued-by-as-much-as-30-per-cent/
http://www.macleans.ca/economy/economicanalysis/bank-of-canada-housing-market-could-be-overvalued-by-as-much-as-30-per-cent/#commentsWed, 10 Dec 2014 18:56:46 +0000The Canadian Presshttp://www.macleans.ca/?p=650995Governor Stephen Poloz maintains the country's real-estate market is still likely headed for a soft landing

OTTAWA — The Bank of Canada is suggesting house prices may be overvalued by as much as 30 per cent, but governor Stephen Poloz maintains the country’s real-estate market is still likely headed for a soft landing.

Even with the risk of overvalued homes, the central bank governor reiterated his forecast Wednesday that the market will unwind gradually along with the improving economy.

“We believe the economy is gathering strength, it’s beginning to rebuild itself, it’s going to create new jobs and income is going to go up,” Poloz told a news conference after releasing the review.

“And all those kinds of metrics are going to start to look better, and so the sustainability of the housing market will be buttressed by that. So, that’s our main source of reassurance from this.”

The Bank of Canada estimated the country’s housing market could be overvalued by 10 to 30 per cent as part of its semi-annual financial system review.

Even as the country continues to show signs of a “broadening recovery,” the bank’s financial system review underscored key vulnerabilities and looming threats.

In particular, it pointed a finger at mounting household debt as one of the biggest weak spots in Canada’s economic armour.

Earlier this month, Poloz maintained the bank’s trend-setting interest rate at one per cent, where it’s been frozen since September 2010.

The low rate has encouraged Canadians to accumulate piles of debt since the recession as a way to help stimulate the battered economy. Most economists and analysts don’t expect the rate to budge until at least the middle of next year.

In the meantime, Canadians will continue to take advantage of cheap credit.

The bank’s report cautioned that Canada’s household debt-to-income ratio is near a record high, conditions that may have been partly fuelled by stiff competition among lenders.

The situation, it said, may have encouraged some Canadians to borrow too much and led financial entities to lend to riskier clients.

The review said 12 per cent of Canadian households as “highly indebted.” The bank said this percentage has been steady in recent years, but is nearly double the level in 2000.

These households carry about 40 per cent of the country’s overall consumer debt load, the study found.

Young homeowners, the bank added, have become even more vulnerable to negative shocks to income and to higher interest rates.

“Among the current generation of young households, those who own homes carry more mortgage debt relative to income than previous generations did at the same age,” the review said.

The bank also warned of increased risk taking in financial markets and noted other emerging threats, such as weakening commodity prices and the plunging price of oil.

Among possible pitfalls that threaten Canada’s position, the bank warned of a sudden rise in long-term interest rates and added financial stress in places like Europe and China.

However, the bank said its overall assessment of Canada’s financial stability remained roughly unchanged since its June review and the probability of an adverse shock had eased.

]]>http://www.macleans.ca/economy/economicanalysis/bank-of-canada-housing-market-could-be-overvalued-by-as-much-as-30-per-cent/feed/0Will the Bank of Canada finally raise its key interest rates?http://www.macleans.ca/economy/will-the-bank-of-canada-finally-raise-its-key-interest-rates/
http://www.macleans.ca/economy/will-the-bank-of-canada-finally-raise-its-key-interest-rates/#commentsTue, 09 Dec 2014 18:40:58 +0000The Canadian Presshttp://www.macleans.ca/?p=650369After 18 months, Stephen Poloz has yet to touch the overnight rate of one per cent, set three years ago

OTTAWA – After 18 months on the job, Bank of Canada governor Stephen Poloz has yet to wield the primary tool at his disposal: the key interest rate.

When Poloz took the bank’s reins in June 2013, he inherited an overnight rate set nearly three years earlier by his predecessor Mark Carney. That rate has yet to budge from one per cent, idling for one of the longest stretches in Bank of Canada history.

With Canada’s economy showing signs of recovery, could 2015 be the year Poloz starts hiking up the central bank’s trend-setting rate and, if so, when?

“I don’t know how itchy his fingers are to start moving that dial,” said Bill Robson, the president of the C.D. Howe Institute think-tank.

Robson, however, believes it will happen sometime in 2015 thanks to an increasingly positive economic outlook, including an improving U.S. economy and a pickup in Canadian exports.

Once the bank’s overnight rate starts to creep up, Canadian businesses will see their borrowing rates rise as will consumers who take out car loans and mortgages.

Ian Lee, a professor at the Sprott School of Business at Ottawa’s Carleton University, predicts businesses will feel the sting of higher rates right away, but he expects the effect on households to be much more muted.

Many consumers, he added, will avoid a sudden jolt because of fixed-rate loans and mortgages.

On top of that, Lee said the rate would likely inch up a quarter-percentage point at a time, making the coming increases easier to manage than the towering Canadian levels of the early 1980s.

Lee, a mortgage manager at the time, recalled how rates soared to 20 per cent in 1981.

“When I hear people … getting all excited saying, ‘Gee whiz, rates might go up to three or four or five per cent’ — I mean, I almost laugh,” Lee said.

“And not because I’m saying it’s trivial, but what I mean is: the Canadian economy and the Canadian people experienced far more savage interest rates.”

Lee said the rate hikes in the early 80s killed the real-estate market, but didn’t create a housing meltdown and the number of foreclosures barely increased.

On the flip side, higher rates would help pension funds reap a bigger return on their investments, Lee added.

The Bank of Canada said last week the country had showed signs of a “broadening recovery” and the output gap appeared to be smaller than it had projected just six weeks earlier. The output gap represents the divide between where the economy stands at a given time and where it would be when performing at its full potential.

However, the bank’s statement offset the positives by pointing to potential threats: weakening oil prices that drive down inflation and the significant risks of high household debt accumulated during years of low borrowing rates.

The basic logic behind low rates is to encourage people to gather debt when the economy is weak, said Ragan, who has worked at the Bank of Canada.

He added, however, that monetary policy is a “pretty blunt instrument” that can’t control those who borrow too much.

“Some people have too much debt, but not everybody,” Ragan said.

“Some firms probably have too much debt, but not all firms. And monetary policy just can’t address that issue.”

A report released last week by Equifax Canada, a credit rating agency, crunched numbers on Canada’s growing mountain of consumer debt.

It found the collective debt of Canadians was more than $1.5 trillion — up 7.4 per cent from a year ago. Excluding mortgages, Equifax said Canadians owed an average of $20,891.

Figures like these raise questions about how much even a slight rate increase would affect Canadians who have gorged on cheap credit.

Robson said while the scale of the debt load is “quite alarming,” he doesn’t anticipate any major rate increases in the near future. He expects the bank to nudge the rate to 1.25 per cent and then, perhaps, to 1.5 per cent six months later.

“It’s interesting after all this time, how our thinking about interest rates has been shaped by this very, very long environment of low interest rates that even an overnight rate of 1.5 per cent could look like a big deal,” he said.

The Bank of Canada hasn’t moved the key interest since September 2010, and by early January, the current pause will become the third longest in its 80-year history.

A spokeswoman for the bank said the longest rates have ever been frozen was almost nine years — between March 1935 and February 1944 – at 2.5 per cent.

The timing of the next rate change remains a source of debate among experts.

Robson belongs to the camp that expects Canada’s strengthening economy to force Poloz to move the rate in the middle of 2015, while Lee predicts the rapidly shrinking output gap will spur an increase as early as this spring.

The Organization for Economic Co-operation and Development recently predicted the Bank of Canada would start pushing the rate up in late May due to advancing inflation, a key driver of interest rates.

At the other end of the spectrum, economists like David Madani of Capital Economics expect Poloz to stand pat for a while, even after the U.S. Federal Reserve starts hiking its own key rate.

He predicts the forces pushing Canadian inflation upwards to remain fairly subdued in 2015, which he says will keep the central bank in a “holding pattern” for the whole year.

Robson said it would even be OK if Poloz raised rates and then edged them back down, if necessary.

“Everybody knows that the central bank has trouble reading the economy just as everyone else does,” he said.

The next few days could bring big announcements – or old news – for Canada, the UK and Europe, as central banks prepare to announce their interest rate targets. In the mean time, volatile oil prices are sending world exchanges on a bumpy ride.

The day ahead

It’s still bank season! The country’s big banks are releasing their earnings this week, with the Royal Bank of Canada reporting today. BMO released their earnings yesterday, with lower than predicted profits. The bank increased their dividend to 80 cents, but shares had slipped a couple dollars by the end of the day.

Update: RBC announced an 11% increase from last year in their fourth quarter earnings, to $2.3 million. Fiscal year earnings were up by 8% to $9 billion. The bank said the increase came from strong retail banking, outweighing lower trading revenue.

The Bank of Canada will announce its interest rate target this morning. But don’t expect anything radical – the interest rate will probably stay at 1 percent.

Oil prices continue to be volatile, after spending Tuesday losing some of Monday’s recovery, and commodity currencies, including the loonie, continue to bounce along with them.

The Loonie took another dip yesterday, down to 87.77 cents to the dollar. The greenback is starting today at a five and a half year high, while the yen and the euro have weakened.

The TSX closed slightly down yesterday on flagging commodities. In the US, Dow Jones industrials, Nasdaq and the S&P 500 all rose yesterday, which has offered a boost to markets in Asia this morning.

Today is the UK’s autumn statement, the second-annual check up on the British budget. Chancellor George Osborne will present the statement, and with election season just months away, expect lots of political theatre. Big announcements will likely include funds for the National Health Service, roads and flood protection, and efforts to get buyers into the highly uneven British housing market. But despite the UK’s position as one of Europe’s strongest economies, the UK is grappling with a high deficit, at 11 percent of national output.

The Bank of England and the European Central Bank will both announce their interest rate targets tomorrow. Will the ECB implement quantitative easing? Prepare to jump on the speculation train, as Mario Draghi urges national governments to fight flagging growth and the threat of deflation.

What you missed

The Canadian auto industry isn’t doing well – the Globe and Mail reports that one of two General Motors plants in Oshawa, Ontario are due to be shut down by 2016, and both will be closed by 2019 – ending a total of 3,600 unionized jobs. Cuts will also be made to a plant in Ingersoll, Ontario. On the other hand, cars are selling in Canada – last month was a record for November.

The future of an oil shipping terminal slated for Quebec is in question, over concern that the location would affect the habitat and breeding grounds of beluga whales. TransCanada Corp.’s Energy East project would transport crude oil from Alberta to refineries in Quebec and New Brunswick. In the mean time, energy regulators in Alberta, BC and Saskatchewan say they’ve banded together to speed up the approval process for pipelines, after delays on TransCanada’s Keystone XL.

Russia will enter a recession. If you’ve been following the impact of international sanctions, falling oil prices, the scrapped South Stream pipeline, and the wildly bouncing ruble, this will come as no surprise. But yesterday, the Kremlin officially acknowledged the country is facing a rocky year ahead.

Senior deputy governor Carolyn Wilkins says the central bank is evaluating the merits of digital currencies like Bitcoin — even as it monitors e-money’s potential pitfalls.

In prepared remarks for her speech Thursday in Waterloo, Ont., Wilkins says people who use e-money need to be aware of the risks of putting their trust in a lightly regulated currency with limited or no user protection.

She says e-money ranges from options like PayPal and pre-paid credit cards to cryptocurrencies like Bitcoin — which are exchanged through computer transactions without the oversight of a central bank.

Wilkins says the increasingly popular digital currencies are not yet big enough to pose material risk to Canada’s financial stability as a whole — but she notes the Bank of Canada is watching.

She says the Bank of Canada has been working with the federal government to modernize Canada’s oversight of the payment method.

Wilkins says virtual money can be used for criminal activities, such as money laundering and terrorist financing.

]]>http://www.macleans.ca/economy/money-economy/bank-of-canada-considering-potential-merits-of-electronic-money/feed/0Stephen Poloz to jobless youth: Move out and work for freehttp://www.macleans.ca/news/canada/leave-folks-basement-and-work-for-free-bank-of-canada-tells-jobless-youth/
http://www.macleans.ca/news/canada/leave-folks-basement-and-work-for-free-bank-of-canada-tells-jobless-youth/#commentsTue, 04 Nov 2014 19:30:17 +0000The Canadian Presshttp://www.macleans.ca/?p=634807Bank of Canada governor Stephen Poloz tells House of Commons committee that young people should work for free

Top of the morning

Just like their gold-mining cousins, Canadian energy companies have to worry about cost containment more than ever, writesThe Globe and Mail’s Jeffrey Jones:

Now, with crude prices skidding, if there’s one thing on which energy investors are laser focused, it’s operating cost.

In many cases, those expenses have been edging up over the past decade, especially as companies shifted away from natural gas and into more valuable oil, which involves higher operating costs.

So far, no one’s talking about shutting production off because of disappearing returns. But margins are getting squeezed, and executives will be forced to temper their plans for capital spending next year to match expectations for lower cash flow.

On the homefront

TSX 60 futures are lower ahead of the open after the composite index booked a triple-digit gain on Tuesday.

The loonie is continuing to build on yesterday’s gains relative to the greenback, trading above 0.897 this morning. “The Canadian dollar appears to be taking another run at 90 cents US, but this time from below, as safe-haven demand for greenbacks has waned and WTI oil has firmed (up 1% to $82.2 a barrel),” writes Bank of Montreal senior economist Sal Guatieri.

A check-up on the health of major Canadian companies. A boatload of quarterly results are expected to land today, including many from gold miners, headlined by heavyweight Barrick Gold (ABX). The highlight of the day, however, will be oil giant Suncor Energy (SU), which is slated to publish its earnings report late this evening. Ahead of the open, Teck Resources (TCK.B) posted adjusted earnings per share of $0.28 for Q3, well below levels seen during the same period in 2013 but above the consensus estimate. Revenues were in line with analysts’ expectations. Management also raised the lower end of guidance on full-year copper production as well as its estimate for full-year zinc output.

Top monetary policymakers to testify before the Senate. At 4:15pm (EDT), Bank of Canada Governor Stephen Poloz and Carolyn Wilkins will testify before the Senate Standing Committee on Banking, Trade, and Commerce in Ottawa. Due to the shootings in the nation’s capital last Wednesday, Poloz and Wilkins’ press conference and testimony before the House Standing Committee on Finance were cancelled. As was universally expected, the central bank kept its policy rate at 1 percent. Of note: the Bank sees the oil-fuelled decline in the Canadian dollar as a net negative for the economy, as the boost to exports will not fully offset weaker consumer and business spending. And while there was no hint as to whether the next move for rates would be up or down, the Monetary Policy Report provided a detailed explanation of why the Bank is keeping rates low – to facilitate as much healing in the labour market as possible.

Timmy’s-Burger King tie-up clears one hurdle. On Tuesday, the Competition Bureau declared that it doesn’t see any issues with Burger King’s proposed acquisition of Tim Hortons (THI). Another regulatory obstacle remains: Industry Canada is also reviewing this transaction to see it passes the “net benefit” test.

The Canada Revenue Agency doesn’t write too well. An internal evaluation found that letters sent to taxpayers from the Canada Revenue Agency are “poorly organized, confusing, unprofessional, unduly severe, bureaucratic, one-sided, and just plain dense,” writesCBC News’ Dean Beeby. This is bad news for both sides, as the recipients haven’t a clue what they’re reading, and the tax department has to waste resources clarifying its communications.

Rail news. This morning, Minister of Transport Lisa Raitt will announce further safety measures for railways stemming from recommendations offered by the Transportation Safety Board in the wake of the tragedy in Lac-Mégantic. Separately, in an interview with Reuters, Agriculture Minister Gerry Ritz indicated that the government would very likely remove the minimum quota for grain shipments at the end of November, as the supply glut has begun to dissipate.

Daily dispatches

The end of QE is nigh. The Federal Reserve will release its latest policy statement at 2:00pm (EDT) this afternoon, at which it is widely expected to announce that its asset purchasing program, commonly known as QE3, is over.nSt. Louis Fed President James Bullard suggested that the Fed could delay the end of quantitative easing, but this view does not appear to be the house view inside the central bank. Most economists also expect that language which indicates that rates will stay at current levels for a “considerable time” and emphasize that there is a “significant underutilization” of labour resources will remain in the statement. The drop-off in inflation expectations is, no doubt, a concern for monetary policymakers, as is the notion that inflation may be set to move lower rather than higher in the short term due to the drop-off in energy prices. However, CIBC chief economist Avery Shenfeld doesn’t think the Fed will sound too downbeat. “Unless the Fed’s world view is even more fickle than the market’s, there’s no room for a dovish surprise in anything the FOMC says,” he writes. “The risks are that any dose of economic optimism will move rates higher.” While regional Fed Presidents Charles Plosser and Dallas Fisher may dissent, it’s more important to get a handle on what the median (and modal) FOMC member’s position is – something we’ll get further clarity on once the minutes from this meeting are published.

Calmness in equity markets has returned, writes IG chief market strategist Chris Weston, and you can thank central bankers for that. “We have seen the Bank of Japan, Bank of England, European Central Bank, People’s Bank of China, and now the Riksbank in Sweden all coming out with dovish or equity-supportive actions,” he says. “This has given investors the confidence to put money to work in the equity market.”

Another positive reading out of Japan: industrial production rose 2.7 percent month over month in September, half a percentage point more than economists anticipated. This print marks the first time this metric has increased on an annual basis since July, however, it’s worth noting that this data point is rather volatile.

]]>http://www.macleans.ca/economy/business/federal-reserve-end-qe-teck-resources-suncor-energy-barrick-gold-tsx-loonie/feed/0It’s the Bank of Canada’s biggest day of the yearhttp://www.macleans.ca/economy/business/tsx-bank-of-canada-valeant-pharmaceuticals-kinross-gold/
http://www.macleans.ca/economy/business/tsx-bank-of-canada-valeant-pharmaceuticals-kinross-gold/#commentsWed, 22 Oct 2014 11:04:48 +0000Lucas Kawahttp://www.macleans.ca/?p=626683Your top financial and economic news for Oct. 22

Top of the Morning

Just about six months ago, a headline flashed across the top of MarketWatch’s home page. It read: “100% of economists think yields will rise within six months.”…

On Tuesday, the 10-year note traded at a yield of 2.21%, almost four-tenths of a percentage point lower than in April. Let’s not forget that the yield unexpectedly dipped below 2%, just last week.

That underscores the difficulty of calling the direction of interest rates. It also makes all 67 economists wrong

On the Homefront

Huge swings have become common fare on Bay Street. In fact, the last time Canada’s benchmark index failed to rise or fall by more than 100 points in one session came before the Toronto Maple Leafs played their first game of the year. On Tuesday, the TSX had its best day of the year, with virtually everything except gold miners posting gains, and attractively-valued energy stocks fuelling the index’s big day. TSX 60 futures are trading to the downside ahead of the open.

It’s the biggest day of the year for the Bank of Canada. At 10:00am (EDT), Canada’s central bank will publish its latest interest rate decision and updated economic forecasts. The Bank is universally expected to maintain the overnight rate at 1 percent for the 32nd consecutive meeting. However, since Governor Stephen Poloz recently indicated that the central bank would no longer be providing forward guidance, there’s a lot of uncertainty regarding how much the language in the statement (and in particular, the final paragraph) might change. In the Monetary Policy Report, the Governing Council will likely bump up its call on U.S. growth and revise its forecast for global growth downwards. As CIBC chief economist Avery Shenfeld quipped, the Bank is in an “on the one hand, but on the other” situation right now: Canada’s largest trading partner is holding up well, but the global economy appears to be losing steam, which, along with supply issues, is having a deleterious effect on commodity prices. Monetary policymakers are likely to bump up their near-term inflation forecasts to reflect past realities – especially the higher starting point for core inflation. Growth forecasts will probably remain largely unchanged. Poloz and Senior Deputy Wilkins will field questions from the press following these releases, and are scheduled to testify before the House of Commons Standing Committee on Finance in the afternoon. For a full primer on what to expect, see here. For a list of questions that Poloz and Wilkins ought to be asked, see here.

The Canadian dollar could be in for a wild ride due to the monetary policy communiqués, but so far, it’s holding steady around 0.89 against the greenback this morning.

Kinross cuts its losses on Ecuadorean mine. Kinross Gold (K) is selling its Fruta del Norte mine to Fortress Minerals, which will change its name to Lundin Gold after the deal is finalized, for roughly $240 million in cash and stock. The company has long battled with the government over tax issues in this jurisdiction, and has taken a massive writedown on this asset. The Fruta del Norte mine is being divested for only one fifth of what Kinross paid for it in 2008.

Another legal front in the Valeant-Allergan saga. Pershing Square, the hedge fund led by Bill Ackman that’s assisting Valeant Pharmaceuticals (VRX) in its quest to acquire Allergan, has filed a counterclaim asserting that the Botox maker make intentionally false and misleading statements about the Canadian pharma giant. “[Pershing Square] says Mr. Pyott [Allergan's CEO] overrode a recommendation from another member of management who said that Allergan’s defensive campaign went too far and disregarded outside advisers by falsely stating that Valeant’s accounting was opaque and problematic,” writes Ross Marowits of The Canadian Press. A hearing on this matter is scheduled for mid-November, about a month before the special meeting of Allergan shareholders is slated to take place. This week, shares of Valeant have been on fire following the firm’s impressive Q3 earnings report and hike to its guidance.

B.C. government unveils LNG tax legislation. The provincial government in British Columbia rolled out a fresh proposal on how it plans to take liquefied natural gas projects on Tuesday afternoon. Compared to February, the ceiling for taxes has come down from 7 to 5 percent. However, the Financial Post’s Geoffrey Morgan and Yadullah Hussain report that “the B.C. LNG Alliance, an industry group representing six of the more advanced projects, wasn’t convinced the industry could be competitive,” calling the province a high-cost environment. Previously, this group had lobbied to receive the same tax treatment as manufacturing firms.

A spot check on the health of the Canadian consumer. Statistics Canada is scheduled to publish retail sales for August at 8:30am. Economists at the Bank of Montreal are calling for a modest increase of 0.2 percent month-over-month after sales fell marginally in July. This rather muted growth suggests that “real GDP likely barely rose in the month,” writes BMO senior economist Sal Guatieri. Going forward, debt-laden Canadian households will continue to find relief from continued low interest rates and a drop-off in the price of oil (and in turn, gasoline).

Daily Dispatches

11 European banks have failed their stress test, according to a report from Spanish newswire EFE. Business Insider’s Mike Bird notes that there was a market reaction to this revelation, with the euro falling against the U.S. greenback. PIMCO expects the number of banks that will fail these reviews, which will be formally announced on Sunday, will rise to 18.

Japan’s exports rose by more than anticipated in September, however, the island nation’s trade deficit remains immense.

Australian inflation was subdued in the third quarter, which gives the nation’s central bank all the cover it needs to maintain the status quo on interest rates. According to Bloomberg, annual trimmed mean inflation was running at 2.5 percent, two tenths of a percentage point below economists’ forecasts.

China’s modestly stronger than expected Q3 growth reduces the odds of further stimulus, but it’s also a welcome signal that less near-term support is needed. “China is more likely to continue with targeted stimulus measures and, if growth hasn’t completely been derailed by now, there is still a good chance the current measures will suffice,” writes IG market strategist Stan Shamu.

On Wednesday, the Bank of Canada will release its latest interest-rate decision and monetary policy report (MPR). The central bank is universally expected to leave the overnight rate unchanged for the 32nd consecutive meeting, continuing the longest period without a rate change since the 1950s.

Traders will continue to parse the Bank’s language for signals of how monetary policy will evolve – and it’s likely that they won’t get as many hints as they have in the past. These publications will be followed by a press conference, and later in the day governor Stephen Poloz and senior deputy governor Carolyn Wilkins are scheduled to testify before the House of Commons standing committee on finance.

Here’s the skinny on what to look for from the Bank:

THE STATEMENT

Typically, the main communiqué from the governing council has been divided into five paragraphs in the Poloz era: a short one that lists the levels of short-term rates controlled by the Bank, another on the inflation outlook, one on the global economy followed by one on the Canadian economy, and a final paragraph that outlines the Bank’s justification for the current stance of monetary policy and offers hints on what to expect going forward.

The first paragraph won’t change one bit.

With regards to the inflation outlook, the moderation in headline inflation (driven largely by a drop-off in gasoline prices) supports the Bank’s claim that the run-up seen earlier this year was fuelled by temporary factors. The level of core inflation (2.1 per cent as of September), however, does not. The governing council is likely to reiterate that the current levels of inflation do not reflect domestic economic fundamentals. To this end, Poloz has said that the Bank plans to publish an “underlying inflation” rate, which will in all likelihood be a modified version of core inflation that strips out some elements that are running rather hot (such as meat prices).

The state of the global economy is broadly similar to what it was in early September: Europe is weak, China’s growth is softening but still robust, and the American economy is on the right track. The Bank may choose to highlight the weakness in global growth and its effect on commodity prices in order to strike a bit of a dovish tone, though the decline seen in the price of oil is more of a supply than a demand issue. Canada’s economic fortunes are closely tied to the United States; if our neighbours to the south continue to do well, odds are that the Canadian recovery story won’t be derailed. “The Bank is in an ‘on the one hand, on the other’ situation right now – our best trading partner is still doing well, but commodity prices are down and those are dependent on the global economy,” said CIBC chief economist Avery Shenfeld. “From a domestic perspective, the only recent development that matters is the drop in the unemployment rate, which suggests a reduction in labour market slack.”

In Canada, economic data to start Q3 was incredibly solid. The nation booked its largest monthly trade surplus since 2008 in July, and manufacturing sales soared to a record high. However, the preponderance of data from August suggests that we took a step back, as manufacturing sales fell far more than anticipated and the trade balance swung back into deficit. These developments cancel each other out; the Bank will remain cautiously optimistic on exports but needs to see far more progress on this front. To borrow from one of the great artists of our time, monetary policymakers are likely wondering, “Are we out of the woods yet?” The answer: it’s far too early to tell, so we’ll have to wait for more data before we can see the forest from the trees.

The final paragraph is the most important one, and it’s also the one in which the language is most likely to undergo significant alterations. The governor has stated his intention to do away with forward guidance – the practice of offering hints on which way rates are likely to go next, or how long they might stay at a given level. “The key we’ll be looking for is to see if there’s any forward information at all,” said Bank of Montreal chief economist Douglas Porter.

Does the end of forward guidance mean that the language characterizing the Bank’s stance as neutral has to be removed? Not necessarily – because one could also make the argument that the Bank isn’t providing much in the way of forward guidance at present by having a data-dependent neutral bias. As previously written, the omission of a phrase indicating that interest rates could go up or down depending on the data flow is merely an affirmation that interest rates could up or down depending on the data flow. Removing this phrase would merely change an explicit data-dependent neutral bias into an implicit one.

However, Poloz’s discussion paper and comments in the press seem to be conditioning the market for a change in this final paragraph, so it would be rather surprising if there isn’t one.

“Any word changes will be aimed at providing less clarity, not more,” said CIBC’s Shenfeld. “Markets will get fewer clues, particularly now that the global economy’s course is increasingly vague.”

THE MONETARY POLICY REPORT

Four times a year, the Bank of Canada updates its projections and offers a detailed look at what it thinks about the Canadian economy, the global economy (in particular, the American economy), and a host of other pertinent issues.

After July’s torrid economic data, many economists were revising their targets for Q3 GDP growth upwards to well above the Bank of Canada’s forecast of 2.5 per cent. August’s underwhelming data have caused those projections to fall back down to earth, and as such, monetary policy-makers’ estimate looks quite prescient.

“I expect the Bank will be happy with its Q3 call, as the recent data flow has disappointed,” said TD senior economist Randall Bartlett.

As mentioned, the Bank will also publish an underlying inflation rate. Monetary policy-makers have engaged in similar thought experiments in the past, stripping out some components that aren’t behaving well, so to speak, in order to provide what they believe to be a more accurate take on inflationary pressures.

However, the governing council always cautions that these modified inflation rates are only useful looking backwards; that there’s no reason to believe the elements excluded shouldn’t be included going forward. As such, this underlying inflation rate is best understood as granular (and perhaps unnecessary) way of confirming the Bank’s thoughts on inflation – that it’s not really as high as the core rate makes it out to be.

“You have to be careful to not just take out the elements that go against your stance on inflation,” said CIBC’s Shenfeld. “The core rate was designed to be a measure that would filter out temporary effects and look at sustained pressures.”

“This underlying inflation rate may create more confusion as to what the Bank’s focus is on,” added TD’s Bartlett. “Alternative measures of core might muddy the waters a bit.”

In the October MPR, the Bank lays out its estimate for potential growth and also makes revisions to previous years. Don’t expect these to change by a substantial amount, though the Bank could elect to show that economic slack didn’t narrow that much in the first half of the year by boosting its estimate for potential growth in 2014 slightly, to two per cent from 1.9 per cent.

TORONTO — TD Bank (TSX:TD) chief executive Ed Clark says the federal government needs to do more to ensure Canadians aren’t taking on more debt than they can handle.

The 67-year-old executive, who retires in November, says he remains concerned about the effect the Bank of Canada’s low interest rate policy is having on spending habits.

He said Ottawa should be reacting more strongly to household debt to income ratios.

“Where these issues have been dealt with successfully is governments who lay out a framework for an industry,” he said in an interview before delivering his final speech as CEO to the Empire Club of Canada.

The Bank of Canada has called household debt the No. 1 risk to the financial system and the economy, and the federal government has tightened mortgage lending rules four times since 2008 in an effort to keep spending from getting out of control.

Earlier this month, the central bank warned that risks associated with household debt still exist and noted that the housing market remained stronger than expected.

Household debt to income soared to a record of 164.1 per cent in the third quarter of last year, but fell slightly to 163.2 per cent in the first quarter. That means Canadians owed just over $1.63 for every $1 in disposable income they earn in a year compared with $1.64 at the end of last year.

Clark said the government needs to take the lead because individual banks aren’t able to “change the world” by encouraging consumers to spend less.

“It’s not possible (in a) competitive capital system,” he said.

Throughout his 12-year tenure in the leadership role, Clark has navigated TD Bank during some of the most challenging years for the industry, including the global financial crisis. He also pushed TD Bank to expand into the United States with branches mostly on the East Coast.

Meanwhile, Clark said Canada’s resilience to many of the global economic challenges that played out several years ago has made the country more vulnerable in the future.

“The risk that comes out of doing extraordinarily well is that you become complacent,” he said. “Canada is not immune (to) a lot of these global changes that are going on.”

Clark’s successor at TD is Bharat Masrani, who will take the chief executive position on Nov. 1 after serving as the bank’s chief operating officer and playing key role in building its U.S. business.

Top of the Morning

Robert Cyran of Reuters Breakingviews writes that investors’ enthusiasm for M&A has been excessive and bucks the historical trend:

Cognizant Technology Solutions may have good reasons for buying health care IT provider TriZetto. But promises of revenue synergies mixed with published materials full of jargon should provoke investor skepticism, not an immediate pop in the buyer’s shares. It’s just one symptom of simmering M&A exuberance…

Just over two-thirds of U.S. acquirers in deals worth at least $1-billion [this year] have seen their shares rise. That’s much more encouraging for deal-making executives than the norm: From 2008 to 2012, the majority of buyers experienced a decline in their stock prices when they announced acquisitions…

Meanwhile, hostile bids have become unusually common this year, often a sign that a merger wave is becoming toppy.

On the Homefront

TSX 60 futures are moving lower ahead of the open after the composite index gave back ground on Monday.

The yield on the five-year Government of Canada bond tumbled overnight, falling nearly two basis points to hover around 1.68 percent.

The loonie is holding yesterday’s gains early this morning, trading above 0.905 against the greenback. “Absent a catalyst to direct the USD, the Canadian dollar gained against all G10 peers, with the loonie advancing +0.4 percent versus the U.S,” writes Adrian Miller, director of fixed income strategy at GMP Securities. “The advance in the loonie was also aided by the OECD report that stated Canada will grow at the second fastest pact among G7 countries, second only to the U.K. even as the group cut Canada’s 2014 growth forecast.”

Poloz makes his most important speech yet. At 12:45pm (EDT), Bank of Canada Governor Stephen Poloz will deliver a speech in Drummondville, Quebec on the role of the exchange rate in the economy and the central bank’s policy framework. Despite widespread claims that the governor has “talked down” the loonie, he’s actually been loathe to offer much commentary on the value of the Canadian dollar at all. That will certainly change today. As analysts at Citi note, there is a noticeable “Poloz effect” – on days when the governor speaks publicly, the loonie falls by more than the euro does on days when Draghi speaks, or the yen on days when Kuroda speaks, and so on. Now, this doesn’t mean Poloz jawbones the currency lower. It does imply that he’s found it more successful to achieve this hidden agenda of a lower currency to help give exports a lift by covert means – talking about too-low inflation or the lingering output gap – rather than adopting the approach of the Reserve Bank of Australia’s Glenn Stevens, whose tired refrain that the aussie is overvalued usually falls upon deaf ears. Poloz has, no doubt, undergone an evolution of sorts when it comes to the exchange rate. Early on in his tenure atop the central bank, he referred to it as one of many variables that monetary policymakers take into account when setting policy; more recently, he has deemed the foreign exchange rate to be critical to the Bank’s analysis. “It’s hard for the governor to be more dovish than he’s been,” says CIBC chief economist Avery Shenfeld. “He’s staked out a dovish position.” Look for Poloz to receive questions on the still-lagging recovery of export segments the Bank has deemed to be sensitive to exchange-rate fluctuations, how the level of the Canadian dollar may affect the eventual ceiling for the overnight rate this cycle, and exchange rate pass-through to core (the extent to which a decline in the currency spurs an increase in the Bank’s less volatile gauge of inflation).

Dutch-based telecom sells stake in Canada’s fourth-largest wireless carrier. After the close on Monday, The Wall Street Journal was the first to report that VimpelCom Ltd., majority owner of Wind Mobile, is set to sell its stake in the struggling carrier. The buyer is Globalive Capital, an investment fund run by Wind Chairman and CEO Anthony Lacavera, which has secured financing from a consortium headed by Toronto-based hedge fund West Face Capital. In a press release, the Dutch telecom giant formally acknowledged the sale of its position in Wind for $135 million and the assumption of debt, which brings the total value of the deal close to $300 million. Globalive also confirmed the news. This purchase price is a sizeable premium to the value VimpelCom attached to Wind back in March, which was $0. This transaction will need to be approved by the Competition Bureau and Industry Canada, but seems likely to receive the government’s blessing. This development signals progress in Ottawa’s attempt to foster a fourth major wireless player in Canada, as Wind’s new deep-pocketed backers will likely ensure it has the funds necessary to purchase a block of spectrum in the 2015 auction, an investment VimpelCom was unwilling to commit to this year.

Valeant’s attempt to acquire Allergan nearing the home stretch. After the market closed on Monday, Valeant Pharmaceuticals (VRX) published a number of slide decks and other filings, including its intention to redeem the outstanding amount of $500 million in senior notes due 2017 on October 15. In two presentations, the company defended its approach to R&D, highlighted the massive growth potential for aesthetics, an outlined its plans for integrating Allergan. This morning, Valeant and Allergan came to an agreement that solidifies the date of the special meeting (December 18), helping both sides avoid litigation costs.

Spain’s biggest bank buys Canadian car financing company. Bloomberg reports that Banco Santander SA will be purchasing Carfinco (CFN), which provides car loans to borrowers unable to access traditional sources, for just under $300 million. That’s a premium over over 30 percent to Carfinco’s average closing price over the past 90 days. The bank highlighted the Canadian market’s “good growth potential.”

Daily Dispatches

Foreign direct investment in China plunged in August, falling 14 percent year-over-year to its lowest level in two and a half years, according to Reuters. On a year-to-date basis, FDI is down 1.8 percent compared to 2013. This soft print follows a string of weak Chinese data released over the weekend that weighed on the TSX’s base metals miners on Monday.

Inflation in the U.K. slowed to a five-year low in August as food price deflation detracted from the headline rate. The core rate, however, edged higher to 1.9 percent. This reading gives the Bank of England’s Mark Carney the necessary wiggle room to shift back to a slightly more dovish stance if he so chooses. House price inflation, however, is running at a much higher clip, with the U.K.’s House Price Index up 11.7 percent year-over-year in July.

German investor confidence dipped to its lowest level since the end of 2012, but still came in above analysts’ expectations. The hope is that aggressive stimulus from the European Central Bank will offset continued fiscal drag and allow euro area economies to enjoy a modicum of growth. “Investor confidence remains fragile across the euro area with both geopolitical and economic concerns weighing on Europe’s largest economy,” writes Bank of Montreal economist Carl Campus.

There are four key event risks that could really shape all asset classes over the coming weeks and months- and they’re right around the corner, writes IG chief market strategist Chris Weston. He highlights the Alibaba initial public offering, the implementation of the European Central Bank’s move to offer longer-term, low-interest rate loans to banks (with the requirement that these funds be lent to the private sector), the Scottish referendum (as the market is not currently positioned for the side supporting independence to come out on top), and, of course, the Federal Reserve’s statement, projections and press conference. “With the U.S. bond market at the center of the financial world, dictating flows in every other asset class (even down to sentiment around holding micro-cap equity), Wednesday’s FOMC meeting is critical,” he writes.

]]>http://www.macleans.ca/economy/business/will-stephen-poloz-finally-talk-down-the-loonie/feed/0Bank of Canada maintains interest rate at one per centhttp://www.macleans.ca/economy/bank-of-canada-maintains-interest-rate-at-one-per-cent/
http://www.macleans.ca/economy/bank-of-canada-maintains-interest-rate-at-one-per-cent/#commentsWed, 03 Sep 2014 14:20:21 +0000The Canadian Presshttp://www.macleans.ca/?p=601799Trend-setting rate hasn't changed in nearly four years

OTTAWA – The Bank of Canada held its trend-setting interest rate at one per cent on Wednesday as it said there needs to be continued growth in Canada’s exports before companies increase their investment and hiring.

The central bank also noted activity in the housing market is stronger than previously thought.

“While an increasing number of export sectors appear to be turning the corner toward recovery, this pickup will need to be sustained before it will translate into higher business investment and hiring,” the Bank of Canada said in its latest statement.

“Meanwhile, activity in the housing market has been stronger than anticipated. The bank still expects excess capacity in the economy to be absorbed during the next two years.”

Economists had widely expected the central bank to make no change to the overnight rate, which has been set at one per cent for nearly four years.

Inflation continues to hover around two per cent, which the central bank said is just as it expected back in July when it released its last monetary policy report.

“Recent data reinforce the bank’s view that the earlier pickup in inflation was attributable to the temporary effects of higher energy prices, exchange rate pass-through, and other sector-specific factors rather than to any change in domestic economic fundamentals,” it said.

But while the risks for inflation remain, in its words, “balanced,” the central bank said the risks associated with household debt have not gone away.

“The balance of these risks is still within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at one per cent,” the central bank said.

Economists had expected a mostly dovish monetary policy report.

“The slightly stronger GDP readings are unlikely to lead the bank to alter its mid-2016 output gap closure particularly amid weak domestic employment readings … along with weak global economic readings,” BMO deputy chief economist Michael Gregory wrote in a note to investors ahead of the Bank of Canada’s announcement.

“This double-whammy of weak readings likely offsets the continued resiliency of housing activity from the bank’s risk management perspective.”

On the global front, the Bank of Canada said the economy is performing largely as expected. Europe’s recovery seems to be “faltering,” it says, while the United States is still on the comeback trail, thanks in part to stronger business investment.

Top of the Morning

In a new post, pseudonymous blogger YVR Housing examines demographic trends in British Columbia and reaches one particularly fascinating conclusion:

The population of the 20-24 age group — the group most likely to be attending post-secondary institutions — is projected to drop [for the next eight years]. This will mean significant pressure on post-secondary institutions’ budgets, so much that the government is, in my view, forced to buttress the shortfall by way of international students. The ramifications of not doing this would be underutilized capital, layoffs, and falling tax revenue. Alongside this, though, we can expect further budget cutbacks to post-secondary institutions for the rest of the decade.

On the Homefront

TSX 60 futures are moving higher after the composite index suffered a slight loss on Tuesday.

The loonie rose overnight ahead of communiqués from North American central banks to trade at 0.917 against the greenback this morning.

Will Stephen Poloz find it difficult to stay dovish? At 10:00am (EDT), the Bank of Canada will release its latest interest rate statement. Monetary policymakers are widely expected to maintain the overnight rate at 1 percent and reiterate their neutral, data-dependent stance. As this statement will not be followed by a press conference with governor Poloz and senior deputy governor Wilkins, it is unlikely that there will be any major tweaks to the language. However, the Bank may acknowledge the rebound in U.S. economic growth in the second quarter, but affirm that downside risks to global growth — and Canadian exports — remain prominent due to the poor performance of European economies. For more, see our preview.

Canadian convenience store giant to release quarterly results. Alimentation Couche-Tard (ATD.B), which operates over 6,000 stores in North American and more than 2,000 in Europe, is scheduled to publish its Q1 results for fiscal 2015 on Wednesday. Analysts are looking for adjusted earnings per share of $0.44 on revenues of just over $9.3 billion for the quarter. This will be the company’s final earnings report with long-time president and CEO Alain Bouchard at the helm; on September 24, COO Brian Hannasch will assume those roles. Shares of Couche-Tard are up 25 per cent year-to-date.

UPDATE: Couche-Tard beat on the bottom line, missed on revenues, and hiked its quarterly dividend by 12.5 per cent.

Major gold producer reports problems at its Mexican mine. After the market closed on Tuesday, Goldcorp (G) reported pit wall instability at its El Sauzal mine in Mexico, which is in the final year of its active mine life. As such, it has halted operations at this site pending an assessment from a geotechnical survey team. This development may cause the miner to fall short of its production targets for the year. Shares of Goldcorp got slammed on Tuesday, falling 4.2 per cent as the price of the underlying commodity slumped.

Energy company announces acquisition, share offering. On Tuesday, Crescent Point Energy (CPG) revealed plans to buy conventional oil assets located in southeast Saskatchewan and Manitoba from Lightstream Resources (LTS) for $378 million. In light of this deal, management hiked its full-year guidance for production and capital spending. To help pay for these Lightstream assets, others it has purchased recently, and the capital expenditures associated with the projects, Crescent Point is raising up to $863 million from a bought-deal share offering.

Ontario-based cloud-printing company bought by Samsung. PrinterOn, which enables people to access printers on their smartphones via the cloud, has been purchased by South Korean technology powerhouse Samsung. According to the press release, this acquisition will reinforce Samsung’s mobile ecosystem (especially for its business-to-business customers) and bolster its leadership in the mobile printing space. Financial terms of this deal were not released.

Daily Dispatches

Geopolitical tensions appear to be fading as Ukraine and Russia work towards a ceasefire, though some fear that this is merely a chess move from Putin that serves to spare the Russian economy from another round of sanctions.

The Australian economy grew 0.5 per cent quarter-over-quarter in Q2, slightly above the consensus estimate. In a speech delivered soon after this print was published, Reserve Bank of Australia Governor Glenn Stevens referred to growth in the first half of 2014 as “moderate.”

Tuesday’s surprisingly strong U.S. manufacturing data bodes well for the economy at large — and, in turn, the U.S. dollar, says IG chief market strategist Chris Weston. “Betting against the USD is ill-advised and, when you see the new orders sub-component on the U.S. manufacturing ISM expanding with such gusto (the index printed 66.7, the highest since 2004), it suggests there are upside risks to the consensus US Q3 GDP at three per cent,” he writes in a note to clients. “There is a startling correlation between the new orders component and GDP – something we’ve seen for many years.”

The Federal Reserve’s Beige Book is slated to be released at 2:00pm (EDT). Bank of Montreal senior economist Michael Gregory notes that this publication “could show better business conditions across the country,” and writes that investors will be keeping a close eye on commentary pertaining to credit creation, the housing market, and wage growth.

Another day, another abysmal piece of data out of Europe. Eurostat reports that the volume of retail sales dipped by 0.4 per cent month-over-month in July. Notably, sales fell by 1.1 per cent in Germany on a monthly basis, suggesting that the eurozone’s more reliable economic engine may be starting to sputter.

China’s services sector continued to fare well in August, with both the “official” purchasing managers’ index and HSBC PMI rising from July, suggesting that this sector’s rate of growth picked up steam. However, it’s still far too early for Chinese policymakers to claim victory on their quest to rebalance growth towards consumer spending.

First off; let me say congratulations: by the time the next interest rate decision is published, you will have held the top spot at the Bank of Canada for 15 months.

You’ve had some big shoes to fill – your predecessor is commonly referred to as a “rock star,” a title not often bestowed upon those in your line of work. But after walking a few miles in his shoes, you’ve proven to be more than up to the task of setting monetary policy to shepherd the Canadian economy through still-rocky waters. Not only that, but you’ve put your own stamp on the institution, and don’t get nearly enough credit for the good work you’ve done.

Under your leadership, the Bank removed the tightening bias (which was long overdue, might I add), introduced a press conference following the publication of the Financial Stability Review to better explain these risks, and admitted the fallibility of the your models.

These were the actions of a central banker who has a deep commitment to honesty and transparency.

That’s why I’m distressed to learn that you’ll be delivering a closed-door speech to members of the Canadian Association for Business Economics (CABE) in Kingston on August 25, as Bloomberg’s Greg Quinn was the first to report. I fear that this decision risks diminishing any goodwill garnered through your previous actions, as the optics of this event are unquestionably negative.

“As a rule, it is preferable to have all comments on the public record to ensure complete transparency from the central bank,” said Bank of Montreal senior economist Benjamin Reitzes, who added that he does not doubt your trustworthiness in this regard.

(Reitzes, I should also note, is a member of the Toronto chapter of CABE, but is unable to attend your speech.)

Governor, you wield an immense amount of power over the Canadian economy. You’re also an unelected official – and rightly so, as monetary policy ought to be free from political influence. However, in large part due to the response to the financial crisis, there is a swath of the population that has become increasingly disillusioned with central banks, and is often downright hostile towards them. This vocal minority considers monetary policymakers to be complicit in the bail-out of financial institutions who profited at the expense of Joe Q. Public, beholden to Wall (or in this case, Bay) Street, and responsible for a huge spike in inflation that is either right around the corner or has already occurred but isn’t adequately reflected in the metrics.

While I think we’d both agree that such views are uninformed, you are handing ammunition to this vocal minority by choosing to deliver a private speech to a group of people who are very likely all in the upper quintile of income earners in this country. You’re giving the impression that you either have something to hide, or something to share that isn’t fit for public consumption. Canada has already endured one blow to a very important institution this week; don’t weaken the nation’s faith in another.

Now, if you intend for this to be a free-flowing discussion between yourself and the attendees, then the benefits of privacy are rather plain to see. It would help certainly help elicit more candid responses from your audience if they had assurance that their comments would not be the subject of public scrutiny.

But if this is a typical Polozian speech – chock full of mixed metaphors and valuable insights – then I fail to see any possible benefits of privacy, and fear you are depriving the public of an opportunity to learn about your view of the world. Since changes in your outlook can have an impact on the mortgage rates Canadians pay and how expensive it is to vacation south of the border, all of us – not just a select group – deserve to know your thoughts.

You’re also cutting it pretty close when it comes to the Bank of Canada’s blackout guidelines, which forbid members of the Governing Council or other senior representatives from delivering speeches or communication with the media one week prior to an interest rate announcement that does not include a Monetary Policy Report. Your address at CABE takes place just nine days before the Bank’s next announcement. These central bank decisions move markets – and yours have had a larger effect than most of your peers’. It’s easy to jump to the conclusion, perhaps unfairly, that those attending your speech are getting an exclusive preview of the following week’s interest rate decision. If there were a right time to deliver a private speech, August 25 certainly isn’t it.

And despite CABE’s directive that your speech will be off-the-record, it is naïve to assume that this will be the case. As BMO’s Reitzes told us, “[Attendees] will likely tell trading floors and clients what [you] said.”

Remember when former Fed Chair Ben Bernanke delivered a speech at a pricey dinner earlier this year?

At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke’s lifetime, one source who had spoken to the guest said…

Another dinner guest was moved when Bernanke said the Fed aims to hit its 2 percent inflation target at all times, and that it is not necessarily a ceiling.

“Shocking when he said this,” the guest scribbled in his notes. “Is that really true?” he scribbled at another point, according to the notes reviewed by Reuters.

The sources requested anonymity because the dinners were private and they were not authorized to discuss the material publicly.

Journalists will be on the phone trying to learn any colourful comment you might have made the moment your speech is over. By electing to hold it in private, you’ve made any potentially actionable information that does come out all the more valuable, that is to say, market-moving, because it has been steeped in secrecy. You’re also increasing the odds that reported comments get taken out of context, which may cause you to stumble into a communications challenge of your own making.

If you fear your speech is rather wonkish and that it won’t be easily understood by the average person, as CABE organizer Paul Jacobsen seemed to suggest, that’s no excuse. Give folks like me a chance to talk to experts and learn exactly what it is that you’re saying, then break it down into digestible nuggets that others can understand. We’re up to the task.

Governor, it’s not too late to request that your speech be opened up to the press. It is my sincere hope that you do so.

The central bank had claimed that its new plastic $10 bank notes included an image of majestic Mount Edith Cavell, a prominent peak in the Canadian Rockies south of Jasper, Alta.

But a sharp-eyed professor in Toronto, who had hiked the mountain with his family, thought something was amiss when the image matched neither his memory nor his photos.

Hitesh Doshi contacted the Bank of Canada by email last November, shortly after the new $10 notes were released, to say something was amiss. He kept getting the runaround until last week.

That’s when the central bank quietly changed its website, removing Mount Edith Cavell and several other peaks from its official description of the back of the $10 bank note, replacing them with some other peaks.

It also sent Doshi a short email, finally acknowledging the error.

“One of the memorable things for me in Alberta was visiting (Mount) Edith Cavell,” he said of a visit with his family. “To us, it was a very memorable trip.”

But when he later examined the $10 bank note, “the peak was not there,” said Doshi, a professor of architecture at Ryerson University and a new Canadian. “That’s where the whole thing started.”

Doshi contacted a mountaineer based in Edmonton, Eric Coulthard, who noticed some other discrepancies in the images of peaks on the bank note. For one, there was a misidentified image of Mount Zengel, which the bank claimed was the Palisade and Pyramid mountains.

“He recognized Zengel right off the bat,” said Doshi, who sent the bank some more unanswered emails in November and December.

Eight months after Doshi’s original inquiries, the Bank of Canada finally removed Mount Edith Cavell and Mount Marmot from its website description of the upper left image of the mountains, saying they’re actually Lectern Peak and Aquila Mountain. Mount Zengel is also properly identified, along with some other changes.

“I can confirm that we changed the description of the $10,” bank spokesman Alexandre Deslongchamps said Monday.

“Image research was undertaken during the development of the polymer (plastic bank note) series. The documentation error was the result of a misunderstanding about information provided to the Bank of Canada by Canadian Bank Note Co. Ltd.”

Added Deslongchamps: “The bank has consulted several subject matter experts to ensure that we now have an accurate identification of the mountains in our documentation for the $10 note.”

The mountain images on the back of the $10 note, which also features a passenger train, were based on commissioned panoramic photographs, with images later cut and pasted to highlight certain peaks, rather than depict an actual panorama.

“Selected areas within those photographs appear in the $10 design, and are now accurately identified on the bank’s website,” Deslongchamps said.

The bank simply changed the website descriptions without a note to readers citing the alterations or the reasons.

Edith Cavell, for whom the peak was renamed in 1916, was an English nurse during the First World War. She was executed by the German army in 1915 for helping Allied soldiers escape from German-occupied Belgium.

The 3,363-metre peak in Jasper National Park formerly had a French name that translates the Mountain of the Great Crossing (La Montagne de la Grande Traversee).

The Bank of Canada’s new polymer series of bank notes, introduced to thwart counterfeiters, has been plagued with problems and misunderstandings.

Vending-machine operators initially complained that the new plastic $20 bills didn’t work properly in their machines. Critics complained that images of pioneering feminists, the Famous Five and Therese Casgrain, were removed from the old $100 bill to make way for the image of an icebreaker on the new, plastic version.

Some Canadians said they believed the scent of maple syrup was added to the bills, which the Bank of Canada denies.

And the bank came under fire when it was revealed the image of an Asian woman on a prototype of the new $100 bank note was changed to look Caucasian when focus groups complained about her ethnicity. Then-Bank of Canada governor Mark Carney later apologized.

Bank of Canada Governor Stephen Poloz is a man whose words can move markets. Many of those words seem to come in the form of metaphors and similes. We’re not talking about the tired old analogies popular among economists, the “headwinds” and “soft landings.” In his attempts to demystify the arcane world of central bank policy, Poloz has likened the Canadian economy to everything from spaghetti sauce to dog leashes to hockey cards—not to mention his deep love of nautical-themed messages.

Here are his most inventive metaphors since he took office last June:

On what it means to “taper” monetary stimulus:

I sometimes use a spaghetti-sauce model to help explain this. When the bubble burst in 2008, we were left with a crater, which is where we now find ourselves. If you look carefully at a pot of simmering spaghetti sauce, under every bubble, there is a crater that’s equal in size. So, a seven-year bubble, a seven-year crater. Central banks have been filling that crater with liquidity, so we can row our boats across it. We need to make sure we’re getting to shore and not just hitting a rock. But when we get to the other side, when we get home and can climb out of the crater, central banks can gradually reduce the rate at which they add liquidity.

On why high oil prices have been good for the Canadian economy:

You’ve got a box of old hockey cards in the basement, right? Everybody does. What if, in that box, you’ve got a Chris Kunitz card from his rookie days. Hey, now that the Regina native is an Olympic gold medallist and two-time Stanley Cup winner, that card is suddenly worth a lot—and you have the incentive you need to go dig it out of the basement . . . With the average world price of oil over the past decade more than double that of the previous three decades, Canada’s resources are suddenly worth a lot, and we have the incentive we need to go dig them out of the ground.

On how the Great Recession will change global monetary policy in the long run:

It brings to mind the sailors of another era who were driven far off course by a nasty storm. When things calmed, they found themselves in the southern hemisphere. Suddenly, the navigational chart that they relied on—the night sky—was completely different. We have every reason to believe that, after the experience of the crisis is behind us, central banking will be defined very differently than it was just five years ago.

On why exchange rates don’t always reflect changes in the economy:

It’s like walking a dog on one of those leashes that stretch out and snap back. You might hope he’ll stick by your side, but, in reality, the dog is always off in all directions. By the end, your respective tracks zigzag all over the place, much like an economist’s chart. But when you leave the park, you’re still together. That’s how the relationship between the terms of trade and the dollar looks: It’s loose, but dependable.

On innovation in the manufacturing sector:

With Canada’s stronger terms of trade, with our healthy business environment, with our ability to innovate, the future of Canada’s manufacturing sector is bright. Just as your favourite maple tree looks different every spring, the sector will evolve, at least on the surface.

Like navigating a ship, we have had to adjust to the currents around us and to bouts of foul weather. Some of the challenges are minor, calling for temporary adjustments in course or speed. Others may involve a major detour. In worst-case scenarios, there are risks of running aground, or even capsizing.

On his communication and management style:

It’s like a duck on a calm lake. On the surface, he looks like he is idle, but, under the water, his feet are really busy.

OTTAWA – The Bank of Canada says the economy is not doing as well as expected and will likely need stimulative monetary policy to stay in place for longer than previously thought to create the conditions for a sustainable recovery.

In a mostly dovish monetary policy report, the bank’s governing council kept in place Wednesday the one per cent trendsetting interest rate that is responsible for some of the lowest borrowing costs in memory. The rate has remained unchanged for almost four years.

But it is the downgrading of expectations for the economy that is likely to catch the markets’ attention.

The bank cut its April projections for global growth this year by four-tenths of a point to 2.9 per cent and for the U.S. — Canada’s most important foreign market — by more than a full point to 1.6 per cent.

The effect on Canada was less dramatic, but still significant. Economic growth projections for 2014 and 2015 were trimmed by one-tenth of a point — to 2.2 and 2.4 per cent respectively.

As well, the bank set further back to mid-2016 the target date for the economy to return to full capacity, suggesting that whatever timeframe markets had for the next interest rate hike, it is likely now to occur three months later.

The key reasons for the downgrade, said the bank, is that the world and particularly U.S. had an “abrupt slowing” at the start of this year — the American economy actually shrank by an eye-popping 2.9 per cent — and while growth has resumed, the bounce-back is not sufficient to make up for what has been lost.

For Canada, that will further delay the expected pickup in exports and business investment the bank had been counting on to put economy on a sustainable growth path.

“Consequently, the economy is expected to reach full capacity around mid-2016, a little later than anticipated in April,” the bank said.

“Closing the output gap over the time frame described above is reliant on continued stimulative monetary policy and hinges critically on stronger exports and business investment.”

Another key change from April is that Bank of Canada governor Stephen Poloz does not appear to be as worried about the risk of super-low inflation, acknowledging that consumers prices have risen faster and higher than it anticipated.

But the bank remains convinced that the recent pick-up to 2.3 per cent, slightly above target, is driven by temporary factors, specifically a bump in oil prices, pass-through from the stronger loonie, and heightened competition within Canada’s retail sector.

Its forecast for inflation to hover around two per cent for the next two and a half years, and for core underlying inflationary pressures to remain below the two per cent target until 2016.

While the bank remains upbeat about the future, it is forthcoming about the soft spots in the Canadian economic landscape, particularly on the jobs front.

It points out that the economy has only managed to eke out about 6,000 jobs a month over the past year, but that the record is actually worse than even that modest number suggests. If not for tens of thousands of Canadians dropping out of the work force, the unemployment rate would be higher than the current 7.1 per cent.

There are about 100,000 fewer people in the prime 25-54 years work-age currently employed or looking for work today than there were six months ago, the bank noted.

“Continuing labour market slack is also reflected in subdued increases in wages,” it added.

The outlook for exports and business investment, which the bank sees as connected, is also not strong, it said.

“The recovery in exports over the projection horizon will continue to be drawn out,” it said. “The expected strong growth in energy exports and the return of growth to non-energy exports (such as manufacturing) will not be sufficient to fill the shortfall left by the weak performance of non-energy exports relative to foreign activity since the end of 2011.

One positive in the bank’s report is that it expects Canada’s housing market to ease toward a soft landing, and that household finances will stabilize. However, it still warns households remain vulnerable to adverse shocks due to the current high level of debt and elevated home prices.

]]>http://www.macleans.ca/economy/bank-of-canada-downgrades-canadian-economy/feed/1Signature analysis: The first woman to sign Canadian currencyhttp://www.macleans.ca/economy/money-economy/signature-analysis-the-first-woman-to-put-her-name-on-canadian-money/
http://www.macleans.ca/economy/money-economy/signature-analysis-the-first-woman-to-put-her-name-on-canadian-money/#commentsTue, 15 Jul 2014 04:15:10 +0000macleans.cahttp://www.macleans.ca/?p=581579Here's what the handwriting of the Bank of Canada's Carolyn Wilkins says about her

Though the image of Queen Elizabeth II appears on the $20 bill, a woman’s signature has never graced a Canadian bank note–until now.

Last week the Bank of Canada published a picture of bills donning signature of newly installed senior deputy governor Carolyn Wilkins about to go to press.

Wilkins was a surprise choice to serve as the second-in-command at the central bank. However, an analysis of her work shows she’s impeccably well-suited to address the biggest challenges facing monetary policy-makers.

In recognition of this historic moment, we turned to Elaine Charal, a certified handwriting analyst, to see what Wilkins’s signature might tell us about her personality.

While graphology is not a precise science, neither is setting monetary policy, according to Bank of Canada governor Stephen Poloz.

“Just like at sea, in monetary policy, the view is not always perfectly clear,” he said during a speech in Montreal. “Given what we’ve been through and continue to experience, our forecasts are not to pinpoint numbers; rather, they represent ranges of likely outcomes. Likewise, our economic models are a better source of questions than answers.”

After Poloz was appointed to take the reins from Mark Carney, Charal offered her thoughts on the new governor’s signature in a piece for CBC, concluding that he had a positive, optimistic outlook. Three months into his tenure atop the central bank, The Economist dubbed Poloz “Sunny Stephen,” citing the cheery message he had been delivering. Since then, reality has begun to dampen the governor’s bright outlook, but it’s fascinating that Poloz’s scrawl offered such a hint about his positive bias.

The slight leftward loop in her ‘a’ in her first name indicates she will deal with issues on her own time and on her own terms, even if this means things may be dealt with slightly later. Her round-topped ‘r’ indicates her willingness to accommodate to the needs of others, and indicates her orientation toward being of service. Carolyn’s letter ‘o’ is open at the top, indicating her desire to share her ideas and thoughts with others.

Carolyn’s high, slender letter ‘l’ in her first and family names indicates her high principles and values that help guide her life. The points at the top of these letters indicate her imagination. The angled connective stroke between her ‘l’ and ‘y’ in her first name indicates Carolyn’s drive to achieve.

Carolyn’s downstroke in her ‘y’ is straight, indicating her determination. The loop itself is retraced, indicating she will be quite selective in the people she allows close; although she likely knows many people, she will prefer to surround herself with an intimate circle of friends with whom she can be herself. The v-wedge at the base of the ‘n’ in her first name indicates Carolyn’s analytical, incisive mind and good ability to solve problems. The final stroke of her first name zooms upward, indicating her ambition and her optimism.

Carolyn’s printed initial indicates some artistic/creative abilities. The sharp points on her capital ‘W’ and on the ‘k’ in her family name indicates her sharp, comprehensive thinking: She can easily stay three steps ahead of many.

The final letters of Carolyn’s family name ‘thread out’, as if a spool of thread has been thrown to the ground. This indicates that Carolyn can be quite the chameleon and can readily adapt to changing circumstances without compromising herself. This enables Carolyn to get further with people than most.

Carolyn’s first name is legible; her family name is not. This suggests how very important and predominant Carolyn’s personal accomplishments are in her mind.

]]>http://www.macleans.ca/economy/money-economy/signature-analysis-the-first-woman-to-put-her-name-on-canadian-money/feed/1Canadians are missing billions, and no one seems to carehttp://www.macleans.ca/economy/money-economy/canadians-missing-billions-and-why-no-one-seems-to-care/
http://www.macleans.ca/economy/money-economy/canadians-missing-billions-and-why-no-one-seems-to-care/#commentsFri, 04 Jul 2014 01:36:31 +0000Jason Kirbyhttp://www.macleans.ca/?p=577559You may be rich—if only you could find those long-lost investments

According to the Canadian Press, there could be anywhere from $4 billion to $7 billion in unclaimed assets sitting in accounts right now.

The Bank of Canada alone is holding nearly $1 billion from bank accounts and Canada Savings Bonds, but experts estimate unclaimed assets across the country could top $4 billion to $7 billion.

Canada is way behind other developed countries in having comprehensive unclaimed property legislation for all its residents, says accountant Brenda Potter Phelan.

“A country so progressive, so socially minded as Canada, I find it hard to stomach that we don’t have some safeguards. In the U.S. and around the world they find this a main part of consumer protection,” she said from Cambridge, Ont., where she runs a website and blog called Legacy Trackers.

Four years ago I looked into the epidemic of misplaced money. It’s not just a case of forgotten bank accounts and savings bonds. Many people have also lost track of investment and mutual fund accounts. For a variety of reasons, from a fragmented investment industry to outright apathy on the part of regulators and firms, there is simply no easy way to reunite people with their loot. Here’s that story, originally published June 21, 2010:

Buy, hold and forget?

You may be rich—if only you could find those long-lost investments

It’s not every day a stranger calls to say they’ve got a sum of money waiting for you to collect, and when it does happen, it’s almost certainly a scam. So when a woman from a Toronto investment firm phoned Cindy Grauer last year and told her she was eligible to reclaim a mutual fund account she didn’t even know existed, alarm bells went off. But after cautiously confirming her identity, Grauer learned both the caller—Alison Pettigrew, a customer relations manager from Front Street Capital—and the fund—a straggler left over from a 20-year-old investment account—were for real. Then came the stunner. “Are you sitting down?” Pettigrew asked. After two decades orphaned on Bay Street, Grauer’s small initial investment had exploded to a healthy five-figure sum. “It’s like winning the lottery,” she says. “But how could something like this happen? It’s outrageous.”

It’s one thing to pursue a buy-and-hold investment strategy, but it’s not supposed to be buy, hold and forget. Yet over the decades many Canadians have lost track of some of their investment assets, whether through negligence or simple absentmindedness, a risk that’s likely to increase with an aging population. But while no one knows how much is sitting unclaimed in mutual funds, stocks, bonds and RRSPs—millions? billions?—there’s no easy way for investors to hunt down their forlorn funds. Nor do government and industry show any interest in doing much about it.

Grauer’s case shows how easily investments can go astray. In the 1980s she had a brokerage account with Pemberton Securities, which she closed at the end of the decade and moved elsewhere. But in the transfer, Pemberton overlooked one mutual fund. The firm was later acquired by Dominion Securities, which in turn was bought by Royal Bank. Front Street, meanwhile, took over management of the fund in 1999.

While Grauer’s account ping-ponged through these takeovers and mergers, it also flourished. Under Front Street’s management, the fund enjoyed average annual returns of 22.9 per cent over the last decade. Yet Grauer might never have learned of her windfall were it not for Pettigrew’s persistence, says the firm’s CEO Gary Selke. Pettigrew made it a personal project to reunite some early investors with their accounts, a task involving hundreds of phone calls. In one case an investor learned of an account worth more than $250,000.

Unfortunately, Pettigrew’s persistence appears unique in the industry. Which is why some, including Grauer, a Vancouver management consultant, believe there should be a national database of unclaimed investment accounts. The Bank of Canada already operates an online system that allows individuals to search through $351 million of unclaimed bank balances for their cash. But investments aren’t included. “I just assumed the Bank of Canada’s site captured investment funds,” says Susan Eng at CARP, a group that represents older Canadians. “At the very least we ought to have a default place where you can try to find your money.”

Easier said than done. Nailing down who would handle such a system triggers a head-spinning round of pass-the-buck. The Department of Finance refers questions to provincial securities regulators, who in turn say it’s a problem for the industry. Industry groups like the Investment Funds Institute say they’ll help individuals search for old investments on a case by case basis, but that it’s really up to the provincial governments. Banks will also hunt down unclaimed accounts if investors contact them, but the problem with this approach is the industry has undergone intense consolidation, and investors may have no idea where to start looking.

One possible organization seen to have the resources to operate a national database is the Investment Industry Regulatory Organization of Canada, the brokerage industry’s self-governing body. But Warren Funt, vice-president for Western Canada, says there are “significant hurdles” to such a database. For one, the IIROC oversees 200 investment dealers, and not firms like mutual fund dealers, portfolio managers and others governed by the rest of Canada’s smorgasbord of watchdogs. Unclaimed investment assets are also more complicated to handle than bank balances. “It’s a worthy objective, but I’m not sure it can practically be done,” he says.

In recent years B.C., Quebec and Alberta have passed unclaimed asset laws. (No such laws exist in Ontario.) B.C.’s Unclaimed Property Society, established in 2003, has a searchable database that includes old credit union accounts, unpaid wages and insurance payments. A spokeswoman says the society would handle investment accounts, but relies on firms to notify it of unclaimed assets. Since its launch, no investment funds have been sent its way. Nor is there a penalty should firms fail to flag unclaimed accounts.

Grauer can’t help wondering just how many other Canadians could be losing out on a chunk of their nest egg. “These companies could be sitting on a ton of money people don’t know about and collecting fees on it.” At the very least, it’s prompted her to dig around for any other stray accounts she may have. “I haven’t found anything else yet, but hope springs eternal.”

OTTAWA – Canada’s annual inflation rate unexpectedly jumped to 2.3 per cent last month, as the continuing gain in energy prices pushed the key economic indicator above the Bank of Canada’s two-per-cent target for the first time in more than two years.

The three-tenths increase in the headline inflation reading, including an identical gain in the underlying core inflation reading to 1.7 per cent, will surprise markets and possibly the central bank as well. The annual inflation rate was two per cent in April.

Economists had expected the headline number to remain at or a touch over two per cent, but a stronger than expected spike in energy costs took the consumer price index to a point where even the central bank may need to revise its thinking.

Last week, bank governor Stephen Poloz came under fire from some analysts for maintaining that the recent run-up in the CPI from as low as 0.7 per cent in October was a temporary phenomenon primarily fuelled by energy costs and that the real danger still was a return to too low inflation.

Energy costs certainly remained frothy in May, rising by 8.4 per cent from last year as natural gas prices leaped by 21.3 per cent.

However, underlying core inflation — which excludes volatile items such as energy and some fresh foods — has also been on the march and the latest reading of 1.7 per cent is only three-tenths of a percentage point below target. On a month-to-month basis core rose 0.5 per cent, as did headline inflation.

Statistics Canada said the key contributors to the increase in core inflation were higher prices for meat, traveller accommodation and electricity. Consumers are paying 10 per cent more for beef than at the start of the year. Prices for fresh or frozen pork have risen by 12.2 per cent during the five-month period.

Some economists have suspected governor Poloz continues to emphasize low inflation risks, which suggests he is a long way from moving to higher interest rates, in order to “talk down” the Canadian dollar and keep conditions accommodating for Canada’s export sales.

The emerging view among analysts is that while there is little danger of runaway inflation, the risk of disinflation has also largely gone given the continuing strength in oil prices and expectations of a growing economy in the U.S. and Canada.

Overall, Statistics Canada said prices increased for all major components from 12 months ago, with shelter costs rising by 3.4 per cent, transportation costs 2.7 per cent, and food by 2.3 per cent. Of the major components, alcohol and tobacco led the way with a 3.6 per cent increase.

Despite the overall gains, there were some bargains to be had in May. Dairy products, digital computing equipment, coffee and tea, cereal products and video equipment were all lower last month than they were a year ago.

Regionally, inflation was highest in Ontario at 2.8 per cent and lowest in British Columbia at 1.5 per cent.

OTTAWA — The Bank of Canada continues to sound the alarm about the country’s housing market and high levels of household debt as the biggest domestic threats to the economy and the financial system.

The central bank’s latest semi-annual review of the financial system concedes that the probability of a sharp housing correction, particularly in prices, is small — but the consequences would be large.

In particular, the bank worries that although the market appears to be headed for a soft landing, certain hot spots like Toronto’s condominium market continue to race forward, and prices continue to rise.

“House prices have continued to rise since the December (report),” the bank’s governing council points out. “Although the more moderate pace of price increases suggests a soft landing, they are still growing faster than disposable income,” the report adds, citing Toronto, Quebec, Winnipeg and Hamilton as cities where prices have increased.

The problem is that the higher prices have been offset by even lower mortgage interest rates, which has kept affordability for households relatively stable. That only adds to the vulnerability if rates begin to rise or an economic shock causes high levels of unemployment.

“High household debt-to-asset ratios and debt-service ratios would increase the likelihood of bankruptcy if their debt burdens become unsustainable following an increase in interest rates or if their homeowner equity was eliminated by a decline in house prices,” the report warns.

Particularly vulnerable to a housing correction may be smaller financial entities, such as credit unions, which may not have the resources of big banks to withstand a reversal.

“Many smaller entities, including some mortgage investment corporations and smaller credit unions, cater specifically to borrowers who do not qualify for insured mortgages. These may include low-income individuals, recent immigrants, rural residents whose income tends to be more volatile.”

On Wednesday, the Paris-based Organization for Economic Co-operation and Development also warned about Canada’s housing market and suggested the government should limit its vulnerability to defaults by reducing the guarantee on mortgage loans. Canada, through the Canadian Mortgage and Housing Corp., insures 100 per cent of high-risk mortgages issued by banks, whereas the OECD says most other industrialized nations guarantee only 10 to 30 per cent.

Recently, several large Canadian banks have lowered their five-year fixed rates below three per cent, although Finance Minister Joe Oliver said he does not see that as a major problem.

Although the Bank of Canada’s latest report does not directly link low mortgage rates to the government insurance system, it does caution that it believes financial institutions are taking on more risk in search of higher profits in the low-interest environment.

Overall, it sees the risks to Canada’s financial system as basically unchanged from December, the last time it reported on the issue, with three out of the four key vulnerabilities coming outside, including a sharp increase in long-term interest rates emanating from the U.S., stress from China and other emerging markets, and weakness in Europe.

It sees risks from China growing due to concerns about the less regulated shadow banking activities, noting that a hard landing in China would be felt globally and in Canada’s resource sector. The risks from the eurozone have lessened, however, it said.

With this report, the central bank is changing the way it reports on financial system risk by stressing each vulnerability separately without giving an overall rating. But governor Stephen Poloz said in an accompanying statement the bank’s “level of comfort as policy-makers remains roughly what it was six months ago.”

As well, the bank governor will give a news conference after each report, a move designed to give greater visibility to the financial system review. Previously, the governor’s news conference only followed release of the quarterly monetary policy report.

As he has in the past, Poloz signalled that he believes the world has entered into a new normal in terms of growth and interest rates tending to be more temperate than was the case before the 2008-09 financial crisis.

]]>http://www.macleans.ca/economy/economicanalysis/bank-of-canada-says-housing-remains-key-risk-to-economy/feed/1David Dodge: Now is not the time to slash and burnhttp://www.macleans.ca/economy/economicanalysis/david-dodge-now-is-not-the-time-to-slash-and-burn/
http://www.macleans.ca/economy/economicanalysis/david-dodge-now-is-not-the-time-to-slash-and-burn/#commentsWed, 11 Jun 2014 10:10:42 +0000The Canadian Presshttp://www.macleans.ca/?p=566551Former bank governor takes issue with the notion that balancing budgets as quickly as possible is the key to strong economy

OTTAWA — Former Bank of Canada governor David Dodge is taking issue with the notion that balancing government budgets as quickly as possible is the key to a strong economy, or that it is a wise policy at the moment.

In a new paper for the Bennett Jones legal firm, where he is now a senior adviser, Dodge analyses the two-speed Canadian economy and has some advice for governments to improve competitiveness and growth.

Without naming any specific governments or politicians, Dodge makes clear that he believes now is not the time to slash and burn to get to a balanced budget.

Instead, the emphasis should be on taking advantage of low interest rates to invest in infrastructure to help improve Canada’s lagging productivity, which he says is holding back the economy.

The aim should not be to get deficits to zero as quickly as possible, but to reduce deficits to below nominal growth in the economy so that deficits become an ever-decreasing share of gross domestic product, he says.

“It is thus important to realize that in the current environment of low long-term interest rates, fiscal prudence does not require bringing the annual budget balance to zero almost immediately. Small increases in borrowing requirements to finance infrastructure investment would still lead to declines in the debt-to-GDP ratio,” he writes.

“Governments should expand their investment in infrastructure while restraining growth in their operating expenditures so as to gradually reduce their public debt-to-GDP ratio.”

The advice from one of Canada’s most respected central bankers _ he headed the institution between 2001 and 2008 during one of the country’s most expansive economic periods _ comes at a time when the issue of fiscal policy is front and centre in political discussion.

On Monday, federal Finance Minister Joe Oliver chided both Ontario and Quebec for failing to corral their deficits, tying fiscal policy in Canada’s two largest provinces to weak economic performance.

The Harper government also has taken pot shots at Liberal Leader Justin Trudeau’s less aggressive stance on deficit elimination. Trudeau has suggested the budget will return to balance through economic growth, without the need for aggressive austerity measures.

As well, Ontario Conservative leader Tim Hudak has made fiscal prudence the central plank in his campaign, promising to eliminate 100,000 public service jobs if elected on Thursday.

By Dodge’s analysis, which he co-wrote with Bennett Jones advisers Richard Dion and John Weekes, one of the chief problems with the Ontario and Quebec economies is loss of competitiveness since 2003 as higher commodity prices, particularly for Alberta oil, pushed up the dollar at the expense of central Canada’s manufacturing sector.

From 2008 to 2012, he says, Canada benefited from favourable terms of trade due to elevated commodity prices, but the spoils were not evenly spread.

“At the same time as they were buttressing real national income and domestic spending, the high commodity prices and terms of trade contributed to keep the Canadian dollar strong, thereby holding down real net exports,” Dodge said.

“The resulting negative impact on real GDP would have varied considerably across provinces … Ontario likely experienced relatively more severe losses of output than other regions of Canada as a direct result of losses in exports.”

As well, Dodge says although commodity sales were a net gain for Canada, the gain was “highly concentrated in commodity-producing Western Canada and Newfoundland and Labrador.”

“The net impact of the terms of trade on real domestic income, on the other hand, we estimate to have been positive for most provinces but not for Ontario.”

In another recommendation, Dodge warns against Canadian regulators falling too closely in line with global financial system reforms being implemented as a result of the meltdown in 2008 that triggered the worldwide recession.

While he agrees with forcing banks to retain more capital to backstop their operations, the move to “deadweight” regulations that add to compliance costs is lessening Canada’s advantage in the sector, he says.

“While Canada still has a fairly efficient financial system relative to other advanced economies, our advantage is declining,” he cautions.

“Canadian authorities should resist pressure from the Basel Committee and the Financial Stability Board to replace our highly successful pre-2008 supervisory process with costly detailed ‘black letter’ regulation, regulation which is often not even appropriate for Canada.”

In the report, Bennett Jones forecasts Canada’s economy will grow by 2.2 per cent this year and 2.4 per cent in 2015.